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ELEMENTS   OF   ECONOMICS 


ELEMENTS 
OF    ECONOMICS 


BY 

A.  G.  FRADENBURGH 

PROFESSOR  OF  HISTORY  AND  POLITICS,   ADELPHI  COLLEGE 

AND  PROFESSOR   OF   ECONOMICS   IN   BROOKLYN  BRANCH,   COLLEGE   OF 

CITY   OF   NEW  YORK 


CHARLES   SCRIBNER'S   SONS 

NEW  YORK  BOSTON  CHICAGO 


M-f?  !-7f 
/ 


Copyright,  1921,  by 
CHARLES  SCRIBNER'S  SONS 


THE  8CRIBNER  PRESS 

A 


PREFACE 

This  book  is  designed  to  be  an  introduction  to  the  science 
of  economics.  Technical  discussions  and  difficult  termi- 
nology have  been  avoided.  The  author  has  endeavored 
to  write  a  book  of  practical  value  to  the  student,  but  is 
convinced  that  any  practical  work  must  be  founded  upon 
sound  theory. 

There  are  many  economic  questions  upon  which  there 
may  be  differences  of  opinion.  Both  sides  of  most  dis- 
puted questions  are  given.  Students  should  be  encour- 
aged to  draw  their  own  conclusions  after  weighing  the 
evidence. 

While  the  experience  of  most  teachers  of  economics  has 
convinced  them  that  one  book  should  be  followed  as  a 
guide,  students  should  read  references  in  other  works. 
Fortunately  there  are  many  excellent  books — perhaps 
too  difficult  in  parts  for  the  beginner — containing  many 
chapters  that  can  be  read  with  profit  by  even  an  imma- 
ture student.  Among  many  works  suitable  for  reference 
purposes  the  following  are  especially  recommended:  Bul- 
loch, Introduction  to  the  Study  of  Economics  ;  Carver,  Prin- 
ciples of  Political  Economy ;  Ely,  Outlines  of  Economics ; 
Fetter,  Principles  of  Economics;  Seager,  Introduction  to 
Economics;  and  Turner,  Introduction  to  Economics. 

Grateful  acknowledgment  is  made  to  the  publishers  and 
authors  of  copyrighted  books  for  permission  to  use  selec- 
tions.    The  Macmillan  Company  has  given  permission  to 


4797Ui 


vi  PREFACE 

print  certain  quotations  from  Ely's  Outlines  of  Economics ^ 
Spargo's  Socialism,  Taussig's  Principles  of  Economics,  and 
Plehn's  Introduction  to  Public  Finance. 

Prentice-Hall,  incorporated,  has  authorized  the  use  of 
selections  from  Gerstenberg's  Economics  of  Business,  and 
Ettinger  and  Golieb's  Credits  and  Collections.  Harcourt, 
Brace  &  Co.  have  granted  permission  to  use  selections 
from  David  Friday's  Profits,  Wages  and  Prices. 

Ginn  &  Company  have  given  permission  to  quote  a  se- 
lection from  Commons's  Trade  Unionism  and  Labor  Prob- 
lems. 

The  selections  from  Wolfe's  Practical  Banking  are  used 
with  the  permission  of  the  La  Salle  Extension  University 
of  Chicago,  Illinois. 

To  Richard  T.  Ely,  the  author  is  indebted  for  the  use  of 
a  selection  from  Problems  of  Today,  a  work  which  is  now 
unfortunately  out  of  print. 

To  Professor  E.  E.  Proper,  of  the  Bay  Ridge  High 
School,  Brooklyn,  and  to  Miss  Amanda  Edson,  of  Emerson 
Hall,  Brooklyn,  the  author  is  indebted  for  helpful  sugges- 
tions. Grateful  acknowledgment  is  made  to  Mr.  H.  K. 
Twitchell,  President  of  the  Chemical  National  Bank  of 
New  York,  and  Mr.  G.  Foster  Smith,  President  of  the 
Nassau  National  Bank  of  Brooklyn,  for  assistance  in  the 
chapters  on  credit  and  banking. 

A.  G.  Fradenburgh. 

Brooklyn,  New  York, 
July  15,  192 1. 


CONTENTS 

CHAPTER  I 

THE   NATURE   OF   ECONOMICS 

PAGE 

THE  SOCIAL  POINT  OF  VIEW — ECONOMIC  DEPENDENCE  UPON 
OTHERS THE  ORGANIC  NATURE  OF  SOCIETY — THE  SUBJECT- 
MATTER  OF  ECONOMICS — ECONOMICS  AND  OTHER  SCIENCES 
—THE  DIVISIONS  OF  ECONOMICS— ECONOMIC  MOTIVES— SUM- 
MARY         I 

CHAPTER  II 

SOME    CHARACTERISTICS    OF    MODERN    ECONOMIC    SOCIETY 

PRIVATE  PROPERTY — PRIVATE  ENTERPRISE — INHERITANCE 
— VESTED  RIGHTS — DIVISION  OF  LABOR  AND  EXCHANGE — 
FREEDOM  OF  LABOR — FREEDOM  OF  CAPITAL — RESTRIC- 
TIONS ON  FREEDOM  OF  LABOR  AND  CAPITAL — COMPETITION 
— MONOPOLY — CUSTOM — SUMMARY lO 

CHAPTER  III 

WANTS  AND  THEIR   SATISFACTION 

ELEMENTARY  WANTS — CULTURAL  WANTS — ADVERTISING 
CREATES  WANTS — GOODS — FREE  GOODS  AND  ECONOMIC 
GOODS — THE  CONSUMPTION  OF  GOODS — PRESENT  AND  FU- 
TURE     GOODS — USEFUL     AND      HARMFUL     CONSUMPTION 

PUBLIC   WEALTH — SUMMARY I9 

CHAPTER  IV 

CONSUMPTION   OF   WEALTH   FURTHER   CONSIDERED 

THE  LAW  OF  SATIETY — THE  LAW  OF  DIMINISHING  UTILITY — 
THE  LAW  OF  VARIETY — THE  ECONOMIC  ORDER  OF  CON- 
SUMPTION— consumer's  GOODS  AND  PRODUCER'S  GOODS — 
NECESSARIES — COMFORTS — LUXURIES — LUXURIES    DO    NOT 


viii  CONTENTS 


PAGE 


INCREASE  DEMAND  FOR  LABOR FAMILY  BUDGETS ENGEL's 

LAW — SOME  RECENT  FAMILY  BUDGETS — MINIMUM-WAGE 
LAWS — SUMMARY 24 

CHAPTER  V 

THE  PRODUCTION  OF  WEALTH 

NATURE  OF  PRODUCTION — PERSONAL  SERVICES — NON-PRO- 
DUCERS— FACTORS  IN  THE  PRODUCTION  OF  WEALTH — NA- 
TURE— LAND  AS  PROPERTY — THE  INFLUENCE  OF  THE  LAND 
UPON  THE  PEOPLE — INCREASE  IN  LAND — THE  INFLUENCE 
OF  THE  CONSUMER  UPON  PRODUCTION — THRIFT  VERSUS 
EXTRAVAGANCE — SUMMARY 39 

CHAPTER  VI 

LABOR  AND  POPULATION 

TEMPORARY  LOWERING  OF  EFFICIENCY  OF  LABOR — DIVISION 
OF  OCCUPATION  AND  DIVISION  OF  LABOR — ADVANTAGES  OF 
THE  DIVISION  OF  LABOR — DISADVANTAGES — THE  GEO- 
GRAPHICAL DIVISION  OF  OCCUPATION — CAUSES  FOR  GEO- 
GRAPHICAL DIVISION  OF  OCCUPATION — INCREASE  IN  POP- 
ULATION-^NATURAL  GROWTH  OF  POPULATION — THE  MAL- 
THUSIAN  THEORY  OF  POPULATION — IMMIGRATION — AMER- 
ICANIZATION— SUMMARY 50 

CHAPTER  VII 

THE  NATURE   AND   USE   OF  CAPITAL 

CAPITAL  AND  CAPITAL  GOODS — FIXED  AND  CIRCULATING 
CAPITAL — FREE  AND  SPECIALIZED  CAPITAL — PUBLIC  AND 
PRIVATE  CAPITAL — THE  ROUNDABOUT  PROCESS  OF  PRODUC- 
TION— CAPITAL  FORMATION — REPLACEMENT  FUNDS — SUM- 
MARY   66 

CHAPTER  VIII 

MARKETS,    VALUE,    AND   PRICE 

DEMAND  AND  SUPPLY — ELASTIC  AND  INELASTIC  DEMAND — 
THE  LAW  OF  SUBSTITUTION — SUBJECTIVE  VALUE — MARKET 


CONTENTS  ix 

PAGE 

VALUE  WHEN  THERE  ARE  MANY  PURCHASERS  AND  ONE 
SELLER — MARKET  VALUE  WHEN  THERE  ARE  MANY  SELLERS 
AND  ONE  BUYER — MARKET  VALUE  WHEN  THERE  ARE  MANY 
BUYERS  AND  MANY  SELLERS — COMPETITION  NOT  ALWAYS 
PERFECT — MARKET  VALUE  OF  COMPLEMENTARY  GOODS — 
THE  MARKET  VALUE  OF  FUTURE  GOODS — THE  RELATION 
OF  COST  OF  PRODUCTION  TO  VALUE — THE  MARGINAL  PRO- 
DUCER— THE  EXAMPLE  OF  OIL  WELLS  A  COMPLICATED  ONE 
— RESTATEMENT  OF  THE   LAW   OF  VALUE — SUMMARY    .       .         72 

CHAPTER  IX 

THE   ORGANIZATION   OF   INDUSTRY 

THE  ENTREPRENEUR — INDIVIDUAL  PROPRIETORSHIP — PART- 
NERSHIPS— LIMITED      PARTNERSHIPS CORPORATIONS — 

STOCKS   AND   BONDS — PROFIT-SHARING — WELFARE   WORK 

CO-OPERATION  AS  A  METHOD  OF  PRODUCTION — INDUSTRIAL 
DEMOCRACY — THE  RELATION  OF  THE  STATE  TO  INDUSTRY — 
SUMMARY 86 


CHAPTER  X 

THE   PRINCIPAL   AMERICAN   INDUSTRIES — HUNTING, 
FISHING,   MINING,    AND   LUMBERING 

CLASSIFICATION  OF  ECONOMIC  INDUSTRIES — EXTRACTIVE 
AND  GENETIC  INDUSTRIES — HUNTING — FISHING — MINING — 
LUMBERING — TIMBER    DEPLETION    AND     PRICES — SUMMARY      lOI 


CHAPTER  XI 

THE   PRINCIPAL  INDUSTRIES    OF   THE   UNITED   STATES — 
STOCK-RAISING   AND   AGRICULTURE 

STOCK-RAISING AGRICULTURE INTENSIVE  AND  EXTENSIVE 

CULTIVATION — THE  LAW  OF  DIMINISHING  RETURNS  IN 
AGRICULTURE — THE  MARGINAL  PRODUCT  OF  LABOR  AND 
CAPITAL — SCIENTIFIC  AGRICULTURE — URBAN  AND  COUNTRY 
POPULATION — DECLINE  IN  RURAL  POPULATION — SIZE  OF 
FARMS — MARKETING    OF   FARM   PRODUCTS — SUMMARY      .        .       II 9 


X  CONTENTS 

CHAPTER  XII 

PAGE 

MANUFACTURING 

THE  INDUSTRIAL  REVOLUTION — THE  FACTORY  SYSTEM — THE 
EXTENSION  OF  THE  FACTORY  SYSTEM  TO  AMERICA — THE 
FACTORY  SYSTEM  STILL  BEING  EXTENDED — TENDENCY  TO- 
WARD PRODUCTION  ON  A  LARGE  SCALE — ADVANTAGES  OF 
THE  SMALL  PRODUCER — MACHINERY  AND  LABOR — THE  LAW 
OF  DIMINISHING  RETURNS  IN  MANUFACTURING — SUMMARY   I37 

CHAPTER  XIII 

TRANSPORTATION 

THE  TURNPIKE  PERIOD — THE  REVIVAL  OF  LONG-DISTANCE 
ROADS — CANAL-BUILDING — RAILROADS — RAILROAD  COMPE- 
TITION— RAILROAD  ABUSES — PUBLIC  REGULATION  OF  RAIL- 
ROADS— THE  RAILROADS  AND  THE  GREAT  WAR — WATER 
TRANSPORTATION — THE  MERCHANT  MARINE  ACT  OF  I920 — 
TRADE   ON   THE    GREAT   LAKES — SUMMARY 1 46 

CHAPTER  XIV 

MERCHANDIZING     ^ 

TRADE  PRODUCES  UTILITY — IMPORTANCE  OF  MERCHANDIZ- 
ING— STORAGE — THE  HIGH  COST  OF  SELLING — SALESMAN- 
SHIP— ADVERTISING — THE  PRINCIPLE  OF  "  CAVEAT  EMP- 
TOR"— SUMMARY 161 

CHAPTER  XV 

INSURANCE 

WHAT  IS  INSURANCE  ? — FIRE  INSURANCE — THE  CONTRACT — 
PREVENTION  OF  FIRE  —  LLOYDS  —  LIFE  INSURANCE  —  THE 
LIFE-INSURANCE  POLICY — DIVIDENDS — THE  SCIENTIFIC 
BASIS  OF  LIFE  INSURANCE — STATE  SUPERVISION  OF  IN- 
SURANCE— OLD     AGE     INSURANCE — ACCIDENT     INSURANCE 

INSURANCE   AGAINST  SICKNESS — THE  USUAL  OBJECTIONS 

TO  STATE  INSURANCE  OF  WORKING  MEN — GROUP  INSUR- 
ANCE— SUMMARY 170 


CONTENTS  xi 

CHAPTER  XVI 

PAGE 

MONEY 

WHAT  IS  MONEY? — WHAT  MONEY  DOES — MONEY  AS  A  ME- 
DIUM OF  EXCHANGE — MONEY  AS  A  MEASURE  OF  VALUE — 
MONEY  AS  A  STANDARD  FOR  DEFERRED  PAYMENTS — QUALI- 
TIES NECESSARY  FOR  GOOD  METALLIC  MONEY — COINAGE — 
SEIGNIORAGE  AND  BRASSAGE — FREE  COINAGE — GRESHAM's 
LAW — BIMETALLISM  IN  THE  UNITED  STATES — INTERNA- 
TIONAL BIMETALLISM — SUMMARY l8o 

CHAPTER  XVII 

PAPER   MONEY 

VARIETIES  OF  PAPER  MONEY — REDEEMABLE  PAPER  MONEY — 
IRREDEEMABLE  PAPER  MONEY — FIAT  MONEY — BANK-NOTES 
— THE  NATIONAL  BANKING  SYSTEM — ELASTIC  CURRENCY — 
THE  FEDERAL  RESERVE  SYSTEM — ISSUES  OF  CURRENCY  BY 
FEDERAL  RESERVE  BANKS — MONEY  IN  CIRCULATION  IN 
THE   UNITED   STATES — SUMMARY I90 

CHAPTER  XVIII 

MONEY   AND   PRICES 

THE  QUANTITY  THEORY  OF  PRICES — EFFECTS  OF  CHANGES 
IN  THE  VOLUME  OF  CURRENCY — THE  MULTIPLE  STANDARD 
— INFLATION  AND  CONTRACTION — INDEX  NUMBERS — THE 
STABILIZED  DOLLAR — SUMMARY 200 

CHAPTER  XIX 

BANKING   AND   CREDIT 

THE  BANKING  FUNCTIONS — THE  DEPOSIT  FUNCTION — 
LOANS  AND  DISCOUNTS— BANK  RESERVES — KINDS  OF  BANKS 
— WHAT  IS  CREDIT? — PROMISSORY  NOTES — BOOK- AC- 
COUNTS —  ACCEPTANCES  —  BONDS  —  CHECKS  —  CERTIFIED 
CHECKS — THE  CLEARING-HOUSE  SYSTEM — BILLS  OF  EX- 
CHANGE AND  DRAFTS — THE  USE  AND  ABUSE  OF  CREDIT — 
SUMMARY 206 


xii  CONTENTS 

CHAPTER  XX 

PAGE 

INDUSTRIAL  DEPRESSIONS  AND  CRISES 

TRUE  EXPLANATION  OF  REGULAR  OCCURRENCE  OF  CRISES — 
OVER-PRODUCTION  AND  CRISES — CROP  FAILURES  AND 
CRISES — THE  RELATION  OF  MIDDLEMEN  TO  CRISES — THE 
BANKS    AND   CRISES — SUMMARY 220 

CHAPTER  XXI 

INTERNATIONAL   TRADE 

NATURE  OF  INTERNATIONAL  TRADE — THE  FOREIGN  TRADE 
OF  THE  UNITED  STATES — BALANCE  OF  TRADE — PAYMENT 
OF  INTERNATIONAL  OBLIGATIONS — THE  EDGE  ACT  AND  THE 
WEBB-POMERENE   ACT — SUMMARY 227 

CHAPTER  XXII       ' 

RESTRICTIONS    ON   INTERNATIONAL  TRADE 

TARIFFS — THE  INFANT-INDUSTRIES  ARGUMENT — THE  HOME- 
MARKET  ARGUMENT — THE  WAR  ARGUMENT — THE  TARIFF 
AND  WAGES — THE  ANTI-DUMPING  ARGUMENT — A  PROTEC- 
TIVE TARIFF  INVITES  RETALIATORY  TARIFFS — THE  PROTEC- 
TIVE TARIFF  AND  MONOPOLIES — WHO  PAYS  THE  TARIFF? — 
PROTECTION  SELDOM  INCREASES  THE  TOtAL  INDUSTRIES 
OF   A   COUNTRY — CONCLUSION — SUMMARY 237 

CHAPTER  XXIII 

MONOPOLIES 

DEFINITION  OF  MONOPOLY — MONOPOLY  PRICES — CLASSIFI- 
CATION OF  MONOPOLIES — PERSONAL  MONOPOLIES — PRI- 
VATE LEGAL  MONOPOLIES — PATENTS — COPYRIGHTS — PUB- 
LIC LEGAL  MONOPOLIES — NATURAL  MONOPOLIES — NATURAL 
MONOPOLIES  OF  LOCATION — NATURAL  MONOPOLIES  BY 
NATURE  OF  THE  BUSINESS — THE  WATER  MONOPOLY — GAS 
AND  ELECTRIC  SERVICE-^THE  TELEPHONE  BUSINESS — 
STREET  RAILROADS — PUBLIC  VERSUS  PRIVATE  OWNERSHIP 
OF  NATURAL  MONOPOLIES — PUBLIC  CONTROL  OF  NATURAL 
MONOPOLIES — LIMITS  TO  REGULATION  OF  PRICES — RAIL- 
ROAD MONOPOLIES — THE  TRANSPORTATION  ACT  OF  1920 — 
GOVERNMENT   CONTROL   OF   RAILROADS — TRUSTS,    OR   CAPI- 


CONTENTS  xiii 

PAGE 

TALISTIC  MONOPOLIES — \VHAT  IS  A  TRUST? — ANTI-TRUST 
LAWS — SUMMARY 246 

CHAPTER  XXIV 

RENT 

DEFINITION  OF  RENT — LAND  ON  THE  MARGIN  OF  CULTIVA- 
TION— IS  THERE  "no-rent  LAND"? — RENTS  OF  AGRICUL- 
TURAL LANDS  DO  NOT  AFFECT  PRICES — DO  AGRICULTURAL 
RENTS  ALWAYS  RISE? — URBAN  RENTS — CHANGES  IN 
URBAN   RENTS — SUMMARY 263 

CHAPTER  XXV 

WAGES 

LIMITS  OF  WAGES — REAL  AND  NOMINAL  WAGES — THE  DE- 
MAND AND  SUPPLY  OF  LABOR — TIME  WAGES — PIECE  WAGES 
— RATE-OF-SERVICE  WAGES — NON-COMPETITIVE  GROUPS — 
ADAM  smith's  REASONS  FOR  DIFFERENCES  IN  WAGES — 
SUMMARY 272 

CHAPTER  XXVI 

LABOR  PROBLEMS 

THE  OPEN  VERSUS  THE  CLOSED  SHOP — STRIKES — SYMPA- 
THETIC STRIKES — GENERAL  STRIKES — LOCKOUTS — ARBITRA- 
TION—  BOYCOTTS  —  CHILD-LABOR  LAWS  —  WOMEN  WAGE- 
EARNERS — THE   EIGHT-HOUR   DAY — SUMMARY  .  279 

CHAPTER  XXVII 

LABOR  ORGANIZATIONS 

THE  SERVICES  OF  LABOR  ORGANIZATIONS — THE  RISE  OF 
LABOR  ORGANIZATIONS  IN  THE  UNITED  STATES — THE 
AMERICAN  FEDERATION  OF  LABOR — THE  INDUSTRIAL  WORK- 
ERS OF  THE  WORLD — THE  LOYAL  LEGION  OF  LOGGERS  AND 
LUMBERMEN — SUMMARY 29I 

CHAPTER  XXVIII 

INTEREST 

WHY  INTEREST  IS  PAID — INTEREST  AS  A  REWARD  FOR  WAIT- 
ING— PURE  AND  GROSS  INTEREST — THE  RATE  OF  INTEREST — 
LONG  AND  SHORT  TIME  LOANS — USURY  LAWS — INTEREST  NOT 
THE   ONLY  INDUCEMENT   TO    SAVING — SUMMARY  .       3OO 


xiv  CONTENTS 

CHAPTER  XXIX 

PAGE 

PROFITS 

NATURE  OF  PROFITS — THE  ENTREPRENEUR  AS  A  RISK  TAKER 
— THE  NATURE  OF  BUSINESS  RISKS — CLASSES  OF  ENTRE- 
PRENEURS —  DIFFERENTIAL  PROFITS  —  EXTRAORDINARY 
PROFITS — WAR   PROFITS — SUMMARY 306 

CHAPTER  XXX 

SOME   PROPOSED   RADICAL   ECONOMIC   CHANGES 

THE  SINGLE  TAX — ARGUMENTS  AGAINST  THE  SINGLE  TAX — 
ANARCHISM  —  COMMUNISM  —  SOCIALISM  —  ARGUMENTS  FOR 
SOCIALISM  EXAMINED — SUMMARY 313 

CHAPTER  XXXI 

PUBLIC   FINANCE 

PUBLIC  AND  PRIVATE  FINANCE  COMPARED — THE  BUDGET — 
GROWTH  IN  PUBLIC  EXPENSES — PUBLIC  REVENUE — ADAM 
smith's  canons  of  TAXATION — DIRECT  AND  INDIRECT 
TAXATION — TAXES  ON  IMPORTS — EXCISE  TAXES — INCOME 
TAXES — INHERITANCE  TAXES — TAXES  ON  REAL  ESTATE — 
TAXES  ON  PERSONAL  PROPERTY — A  PROGRAM  OF  TAXA- 
TION— EXEMPTIONS  FROM  TAXATION — TAXES  ON  SALES — 
PUBLIC  DEBTS — THE  LIBERTY  AND  VICTORY  LOANS — SUM- 
MARY    325 

CHAPTER  XXXII 

SOCIAL  AND  ECONOMIC  BETTERMENT 
RECENT  SOCIAL  AND  ECONOMIC  PROGRESS — METHODS  OF 
ECONOMIC  PROGRESS — INCREASED  PRODUCTION   SHOULD 
BENEFix  ALL 345 

APPENDICES 

APPENDIX  I — INDUSTRIAL  REPRESENTATION  PLAN  OF  THE 
FACTORY  OF  THE  GOODYEAR  TIRE  AND  RUBBER  COM- 
PANY,   AKRON,    OHIO 351 

APPENDIX  II — AMERICANIZATION — WHAT  IS  IT?        .  356 

INDEX 359 


ILLUSTRATIONS 


PAGE 


Chicago  water  front 43 

/     Desert  land  made  fertile  by  irrigation 45 

Skilled  workmen  in  a  Chicago  packing-house 53 

A  stock  certificate 91 

Coal  production  of  the  United  States 105 

Production  of  iron  ore  in  the  United  States 106 

Bakersfield  oil  region  in  California 109 

Timber  depletion no 

A ''skidder  machine" in 

Destruction  by  forest-fire 115 

Corn  production  of  the  United  States 121 

Wheat  production  of  the  United  States 122 

Unloading  cotton 123 

Cotton  production  of  the  United  States 124 

Machinery  in  use  on  a  Western  farm 125 

Farm  lands  in  New  England  and  Montana 129 

Scene  in  a  Detroit  automobile  factory 143 

Mitchell  Point  on  the  Columbia  River  highway     ....  147 

Barges  on  the  Mississippi  River 151 

XV 


xvi  ILLUSTRATIONS 

PAGE 

An  ocean  liner  and  an  express-train 155 

The  "curb"  market  on  Broad  Street,  New  York  ....  165 

A  promissory  note  secured  by  collateral 208 

A  promissory  note  and  draft 211 

A  trade  acceptance  213 

A  bank  acceptance 214 

A  certified  check 215 

A  foreign  bill  of  exchange 231 

A  commercial  letter  of  credit 233 

Map  illustrating  rent    .      .      .  .      .      .      .      .      .      .      .  265 

A  city  apartment-house  and  a  suburban  house       ....  267 

Cartoon  illustrating  war  expenses 339 

Selling  liberty  bonds  in  New  York 341 


ELEMENTS   OF   ECONOMICS 


THE    ELEMENTS   OF   ECONOMICS 

CHAPTER  I 
THE  NATURE  OF  ECONOMICS 

Economics  treats  of  man  in  his  relation  to  wealth.  It 
tells  how  men  make  a  living  and  how  they  may  make  a 
better  living.  It  is  concerned  with  the  production  of 
wealth,  how  wealth  is  divided  among  the  various  members 
of  the  community,  and,  how  wealth  is  used.  It  has  also 
to  do  with  plans  for  a  larger  production  of  goods,  a  more 
equitable  distribution,  and  a  more  rational  and  more  eco- 
nomic consumption. 

Not  many  years  ago  the  subject  was  called  Political 
Economy.  Some  authors  still  prefer  this  title,  but  Eco- 
nomics is  the  more  appropriate  term,  inasmuch  as  many 
subjects  discussed  in  economics  are  not  at  all  political. 

The  Social  Point  of  View. — Most  people  consider  their 
own  economic  well-being  as  of  first  importance.  This 
is  natural.  The  economist,  however,  looks  at  all  things 
from  the  social  point  of  view,  that  is,  "the  greatest  good 
to  the  greatest  number."  The  individual  economic  inter- 
est is  often  opposed  to  the  social  interest.  For  example, 
a  few  years  ago  the  Louisiana  State  Lottery  was  a  profitable 
enterprise  for  a  small  group  of  men.  Its  operations  were 
opposed  to  the  economic  interests  of  a  majority  of  the 


2  THE   ELEMENTS  OF  ECONOMICS 

people  of  Louisiana  and  of  the  nation  and  to  the  moral 
interests  of  all.  The  State  of  Louisiana,  in  refusing  to  per- 
mit the  company  to  continue  in  business,  rendered  an  eco- 
nomic as  well  as  a  social  service.  Then,  again,  the  owners 
of  a  cotton-mill  might  benefit  by  employing  child  labor, 
but  the  public  would  not  benefit. 

Economic  Dependence  upon  Others. — In  earlier  times 
every  family  was,  to  a  large  extent,  independent  of  every 
other  family.  It  produced  its  own  food,  made  its  own 
clothing,  and  lived  in  its  own  house  supplied  with  water 
from  its  own  well  and  lighted  with  candles  made  from  the 
tallow  of  its  own  sheep.  Such  A^as  the  condition  in  America 
during  colonial  times. 

Now  all  is  changed.  No  one  is  economically  indepen- 
dent. Each  of  us  renders  some  service  or  produces  some 
commodity  for  others  and  receives  payment  in  money  with 
which  to  purchase  the  goods  we  need.  Recently  a  popular 
magazine  showed,  even  for  a  simple  meal,  our  dependence 
upon  others: 

"The  pepper  came  from  ten  thousand  miles  away.  It 
grew  on  a  little  bush  about  eight  feet  high,  which  must 
have  had  a  growth  of  at  least  five  years.  The  pepper  was 
picked  green,  it  had  to  be  dried  in  the  sun,  and  this  meant 
employing  women.  It  took  one  ship  and  a  thousand  miles 
of  railroad  to  bring  the  pepper  to  the  United  States.  The 
tea  on  the  table  came  from  China  and  the  coffee  from 
South  America.  The  codfish  had  to  be  brought  from 
Maine.  Men  had  to  be  employed  to  catch  the  fish;  other 
men  and  women  were  employed  in  drying,  packing,  and 
boxing  it,  and  it,  too,  had  to  make  a  long  railroad  journey. 
The  flour  of  which  the  bread  was  made  was  grown  in 


THE   NATURE   OF   ECONOMICS  3 

Dakota;  some  one  owned  the  land,  and  that  meant  the 
investing  of  capital;  and  then  he  had  also  to  pay  wages 
to  working  men.  The  wheat  had  to  be  ground,  and  the 
building  of  the  mill  and  the  plant,  or  machinery,  meant 
more  money  invested.  The  millers  had  to  be  paid;  coopers 
had  to  be  paid  for  making  the  barrels;  and,  of  course,  the 
wood  of  which  the  barrels  were  made  had  to  be  cut  and 
sawed  and  shaped,  and  this  meant  the  employing  of  more 
men.  Then  the  flour  had  to  be  shipped  over  the  railroad 
and  handled  again  by  cartmen  before  it  came  into  the 
house.  The  salt  came  from  the  Indian  Reservation  in 
the  northwestern  part  of  New  York  State.  The  canned 
peaches  came  from  California,  and  they  too  represented 
the  employment  of  capital  and  labor.  The  spices  in  the 
cake  came  from  the  Spice  Islands  in  the  Indian  Archi- 
pelago." 

The  only  items  on  the  table  which  could  be  produced 
within  the  county  where  the  meal  was  eaten  were  corn 
bread,  butter,  and  buttermilk.  It  is  estimated  that  the 
little  meal  represented  directly  or  indirectly  the  employ- 
ment of  five  hundred  millions  of  dollars  of  capital  and  of 
five  millions  of  men. 

The  Organic  Nature  of  Society. — Our  dependence  upon 
others  has  caused  society,  which  includes  all  of  us,  to  be 
regarded  as  an  organism,  just  as  the  human  body  is  an 
organism.  Some  parts  of  this  social  organism  do  one  thing 
and  some  another.  The  services  of  each  part  are  necessary 
to  the  welfare  of  the  whole.  Suppose,  for  example,  the 
railroads  fail  to  bring  us  food  and  fuel.  Then  the  whole 
social  organism  suffers.  Just  as  the  human  body  cannot 
do  its  work  if   the  nervous  system  is  out  of  order,  so 


4        THE  ELEMENTS  OF  ECONOMICS 

society  depends  upon  its  nervous  system — the  telegraph 
and  telephone  lines.  We  are  truly  our  brother's  keep- 
ers. 

The  Subject-Matter  of  Economics. — Economics  deals 
with  subjects  in  which  every  one  is  interested.  Such  sub- 
jects as  the  protective  tariff,  public  ownership  of  railroads, 
money  and  banking,  stocks  and  bonds,  labor  problems,  and 
monopolies  are  of  concern  to  each  of  us.  The  main  object 
in  the  study  of  economics  is  to  teach  us  to  think  correctly 
on  economic  questions. 

Economics  and  Other  Sciences. — Every  science  is  in 
some  way  related  to  economics.  For  example,  arithmetic 
is  used  in  the  conduct  of  the  smallest  business.  The  higher 
mathematics  are  employed  by  surveyors,  architects,  me- 
chanical and  electrical  engineers.  Statistics  form  the  scien- 
tific basis  of  the  life-insurance  business  and  are  used  by 
business  men  in  calculating  costs  and  determining  the  re- 
sults of  advertising  campaigns.  Chemistry  and  physics 
must  be  known  by  the  scientific  farmer  as  well  as  by  those 
who  engage  in  manufacturing.  Among  the  social  sciences 
sociology  and  history  are  most  closely  related  to  economics. 
Sociology  is  the  science  which  treats  of  man  in  his  relations 
with  his  fellow  men.  Economics  may  be  considered  as 
that  branch  of  sociology  which  has  to  do  with  how  men 
make  a  living.  History  is  of  such  importance  to  economics 
that  every  historian  must  be  something  of  an  economist 
and  every  economist  must  be  well  versed  in  history.  The 
English  historian  Freeman  once  said  that  "History  is  past 
politics  and  politics  is  present  history."  Many  modern 
historians  would  also  say  that  history  is  past  economics 
and  economics  is  present  history. 


THE   NATURE   OF   ECONOMICS  S 

The  Divisions  of  Economics. — Economics  may  be  re- 
garded as  consisting  of  three  sections:  (i)  Consumption 
of  wealth,  (2)  production  of  wealth,  (3)  distribution  of 
wealth. 

1.  The  consumption  of  wealth  deals  with  the  use  or 
using  up  of  goods.  Some  goods,  like  edibles,  are  used  in 
one  process  and  are  known  as  perishable  goods.  Others, 
like  a  house,  may  be  used  for  many  years  and  are  known  as 
durable  goods. 

2.  Production  has  to  do  with  making  things  ready  for 
use.  Nature  furnishes  raw  material,  but  man  must  gather 
it  and  prepare  it.  The  relation  between  production  and 
consumption  of  wealth  is  close.  Goods  are  produced  in 
order  that  they  may  be  consumed.  Demand  results  in 
goods  being  supplied.  But  a  supply  sometimes  creates  a 
demand.  The  desire  for  a  means  of  flying  led  to  the  in- 
vention of  the  airplane,  but  the  production  of  airplanes 
produced  a  demand  for  them  among  persons  who  had  never 
before  considered  the  possibility  of  flying. 

3.  Distribution  deals  with  the  incomes  which  the 
various  members  of  society  receive.  Rent,  wages,  interest, 
and  profits  are  the  subjects  discussed  in  considering  the 
distribution  of  wealth.  Most  of  the  great  economic  ques- 
tions of  to-day  refer  to  distribution.  For  example,  the 
interests  of  labor  and  capital  are  identical  in  the  production 
of  wealth.  Both  are  interested  in  a  large  production,  for 
the  more  produced  the  more  there  will  be  to  divide;  but 
when  it  comes  to  distribution  their  interests  often  seem  to 
clash.  The  capitalist  thinks  the  laborer  wants  more  than 
his  just  share,  and  the  laborer  thinks  the  capitalist  is  the 
offender,  and  often  both  condemn  the  landlord  as  a  con- 


6  THE   ELEMENTS   OF   ECONOMICS 

scienceless  profiteer.  Tq  secure  such  a  distribution  of 
wealth  as  will  be  most  fair  to  all  parties  is  an  economic 
ideal  toward  which  progress  is  being  made. 

Economic  Motives. — Men  are  impelled  to  work  by  a 
variety  of  motives  and  these  motives  are  found  in  different 
proportions  with  different  men.  Self-interest  is  a  powerful 
motive  to  induce  men  to  work,  but  this  is  usually  an  en- 
larged self-interest.  The  pleasure  of  a  night  at  the  opera 
is  more  than  doubled  by  sharing  it  with  another.  The 
same  is  true  of  a  trip  to  Europe,  an  automobile  ride,  or 
anything  that  can  give  pleasure  to  a  member  of  the  family 
or  to  a  friend.  The  phrase  ''economic  man"  was  coined 
to  describe  a  man  wholly  influenced  by  his  own  selfish 
interests.  Such  a  man,  if  he  ever  existed,  has  fortunately 
been  rare.  The  normal  man  works  that  he  may  secure 
necessities,  comforts,  and  luxuries  for  himself  and  that 
he  may  provide  a  competence  which  will  support  him  in 
ill  fortune  and  in  old  age.  But  what  he  wishes  for  himself 
he  doubly  wishes  for  his  wife  and  children  and  others  de- 
pendent on  him. 

Social  esteem  is  also  a  powerful  motive.  Men  like  to  be 
well  thought  of  in  the  community  in  which  they  live  and 
will  shun  employments  which  their  friends  and  companions 
regard  as  dishonorable  or  degrading.  Social  esteem  ex- 
plains why  girls  prefer  to  work  in  a  factory  rather  than  as 
domestic  servants,  even  though  the  hours  of  labor  and 
other  conditions  may  be  equal.  The  profession  of  law  is 
held  in  high  esteem,  and  every  lawyer  wants  to  be  success- 
ful not  only  because  of  the  income  which  success  will  in- 
sure but  because  of  the  standing  his  profession  will  afford 
him  in  his  community.     A  successful  lawyer  wants  to  be- 


THE   NATURE   OF   ECONOMICS  7 

come  a  judge,  though  his  income  as  a  judge  may  be  much 
less  than  he  could  obtain  as  a  lawyer. 

Another  motive  to  economic  activity  is  the  desire  for 
employment.  For  real  men  and  women  a  certain  amount 
of  activity  is  pleasurable.  For  them  loafing  is  the  hardest 
kind  of  work.  Many  a  man  keeps  at  work  because  he  likes 
to  be  employed  when  it  is  no  longer  necessary  for  him  to 
work. 

The  instinct  for  association  is  another  motive  for  activ- 
ity. People  want  to  do  what  others  are  doing,  and  in  the 
United  States,  where  most  people  are  working,  it  is  the 
fashion  to  work.  In  some  countries,  where  there  is  a  large 
leisure  class  and  where  work  is  not  held  in  such  high  es- 
teem, a  part  of  the  population  finds  association  in  idleness. 

Altruism,  or  the  desire  to  help  others,  causes  economic 
activity  among  many  of  our  people.  Either  impelled  by  re- 
ligion or  ethics,  most  people  want  to  leave  the  world  better 
than  they  found  it.  They  work  and  accumulate  riches  in 
order  that  they  may  endow  colleges  or  hospitals  or  do  some 
service  for  mankind.  This  motive  is  not  confined  to  the 
very  rich.  Many  a  day-laborer,  during  the  period  of  the 
war,  gladly  worked  overtime  for  a  season  in  order  that  he 
might  make  a  contribution  to  some  of  the  war  charities. 

Summary. — Economics  is  a  science  which  deals  with  man 
in  his  relation  to  wealth.  Society  may  be  regarded  as  an 
organism  and  every  person  has  a  service  to  perform  for  the 
common  good.  All  persons  who  can  work  and  do  not,  are 
not  only  hurting  themselves  but  are  injuring  society. 
Every  science  has  some  relation  to  economics,  but  history 
and  sociology  are  especially  helpful.  From  history  we 
learn  the  experience  of  men  and  can  avoid  the  mistakes 


8         THE  ELEMENTS  OF  ECONOMICS 

and  profit  by  the  successes  of  those  who  have  preceded 
us.  Since  the  economic  life  of  man  is  closely  related  to 
his  other  activities,  sociology  is  helpful  to  the  student  of 
economics.  For  convenience  in  treatment,  economics  is 
divided  into  three  sections:  (i)  The  consumption  of 
wealth,  (2)  the  production  of  wealth,  (3)  the  distribu- 
tion of  wealth.  Each  section  is  closely  related  to  the 
others.  Some  economists  prefer  to  begin  the  discussion  of 
our  science  with  the  production  of  wealth;  others  with  the 
consumption  of  wealth.  Many  motives  impel  men  to 
work.  Among  the  more  important  are  self-interest,  the 
desire  for  social  esteem,  the  pleasure  that  comes  from  being 
employed,  the  instinct  for  association,  and  the  desire  to 
help  others. 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1.  What  is  a  science ?     Is  economics  less  of  a  science  than  mathe- 

matics ?  How  do  the  social  sciences  differ  from  the  physical 
sciences  ? 

2.  Give  some  illustrations  of  the  conflict  between  individual  and 

social  interests. 

3.  Show  how  you  are  dependent  upon  others  for  the  materials 

used  in  your  classroom.  How  many  men  do  you  suppose 
contributed  toward  making  your  classroom  what  it  is  ? 

4.  We  have  mentioned  in  the  text  five  motives  which  impel  men 

to  work.  See  if  you  can  find  any  other  motives  which  influ- 
ence some  men. 

5.  Which  motive  do  you  think  is  the  most  important?    Do  the 

same  motives  appeal  in  the  same  proportion  to  a  lawyer 
and  a  teacher  ?  To  a  farmer  and  a  clergyman  ?  To  a 
missionary  and  a  pawnbroker? 

6.  Professor  F.  A.  Fetter  of  Princeton  University  speaks  of  men 


THE   NATURE   OF   ECONOMICS  9 

being  influenced  to  work  by  their  desire  to  serve  the  public. 
Their  reward  is  largely  in  **  their  own  consciousness  of  duty 
well  performed."  This  reward  he  calls  "psychic  income." 
Give  an  illustration  of  psychic  income  that  has  come  to 
some  persons  in  your  community.  What  psychic  income 
have  you  received? 
Some  economists  say  that  society  is  an  organism.  Others  pre- 
fer to  say  that  society  is  like  an  organism.  Which  expres- 
sion do  you  prefer  ?     Why  ? 


CHAPTER    II 

SOME   CEARACTERISTICS   OF   MODERN   ECONOMIC 
SOCIETY 

Private  Property. — In  modern  times  most  property  is 
owned  by  private  persons.  People  care  for  the  things 
which  they  can  call  their  own.  A  man  who  owns  his  own 
home  has  a  pride  in  its  possession.  He  has  a  personal 
interest  in  his  city  and  in  the  street  on  which  he  lives. 
This  makes  for  good  citizenship.  Private  property  exists 
because  it  is  to  the  interest  of  most  people  that  it  should 
exist. 

Private  Enterprise. — ^As  with  property  so  industry  is 
chiefly  in  private  hands.  Agriculture,  manufacturing, 
mining,  transportation,  professional  services,  and  banking 
are  as  a  rule  private  enterprises.  In  some  foreign  coun- 
tries the  State  owns  and  operates  the  railroads,  engages  in 
the  banking  business,  manufactures  and  sells  certain  goods, 
but  even  in  these  countries  most  industries  are  privately 
owned  and  operated. 

Though  private  property  and  private  industry  are  the 
rule,  there  is  everywhere  a  certain  amount  of  public  con- 
trol. For  example,  corporations,  before  they  can  do  busi- 
ness, must  meet  the  conditions  prescribed  by  law.  Fac- 
tories must  be  run  in  accordance  with  the  sanitary  code 
and  the  legal  requirements  of  labor.  Rates  charged  by 
public-service  corporations  must  not  exceed  legal  rates. 
Food  products  must  be  clean  and  properly  labelled.     Nui- 


CHARACTERISTICS   OF   MODERN   SOCIETY         ii 

sances  and  illegal  business  are  forbidden.  Certain  profes- 
sions like  medicine,  dentistry,  and  law  cannot  be  practised 
unless  a  state  examination  be  passed.  Such  regulations 
are  in  the  interest  of  private  persons,  who  would  otherwise 
be  unable  to  protect  themselves  against  dishonest  and 
grasping  employers  or  incompetent  professional  men. 

Inheritance. — Closely  associated  with  the  right  of  own- 
ing property  is  the  right  of  disposing  of  property.  During 
the  life  of  the  owner  there  is  no  restriction  in  his  power  to 
sell  his  property,  except  that  in  most  states  a  married 
man  cannot  sell  land  without  his  wife's  consent.  How- 
ever, his  power  to  dispose  of  property  after  death  is  limited 
by  all  states.  The  law  prescribes  how  wills  must  be  made  ] 
and  makes  provision  in  regard  to  the  disposition  of  prop- 
erty in  the  absence  of  a  will.  In  most  states  a  man 
cannot  disinherit  his  wife,  and  his  minor  children  have 
rights  that  must  not  be  ignored.  In  America,  unlike  Eng- 
land, land  must  not  be  left  in  entail,  as  it  is  called,  if  a 
will  prescribes  that  an  estate  shall  pass  to  a  certain  class 
of  heirs,  like  the  eldest  sons,  through  all  future  time. 

Vested  Rights. — Vested  interests  are  rights  which  cannot 
be  disturbed  unless  the  owners  of  these  interests  receive 
compensation.  They  usually  exist  in  property  or  con-  ' 
tract.  Vested  rights  were  everywhere  in  evidence  in  feudal 
times,  extending  even  to  offices.  Professor  R.  T.  Ely  gives 
several  survivals  of  mediaeval  vested  rights:  *' Leeds  was 
compelled  by  a  feudal  arrangement  to  grind  its  corn,  grain, 
and  meal  at  the  lord's  mill  till  well  on  in  the  last  cen- 
tury, and  finally  had  to  pay  £13,000  to  terminate  these 
obligations !  When  Prussia  bought  the  railroads,  the  rail- 
way presidents  were  indemnified  for  the  loss  of  their  posi- 


12  THE  ELEMENTS   OF  ECONOMICS 

tions  by  large  payments;  in  other  words,  their  offices  were 
looked  upon  as  vested  interests.  England  is  the  classic 
land  of  vested  interests.  An  office  in  the  army  was  until 
recently  looked  upon  as  such,  and  so  was  an  appointment 
in  the  established  church."  In  the  United  States  vested 
interests  have  never  played  so  important  a  part  as  in  Eu- 
rope, doubtless  because  America  never  passed  through  a 
feudal  regime.  When  the  XVIIIth  Amendment  to  the 
Constitution  of  the  United  States  deprived  them  of  the 
value  of  much  of  their  property  without  compensation,  the 
distillers  and  brewers  advanced  the  claim  that  their  vested 
rights  were  violated.  However,  the  claim  was  not  al- 
lowed. Street  railroad  companies  in  their  competition 
with  motor  busses  have  sometimes  been  regarded  as  pos- 
sessing vested  interests  which  protect  them. 

Division  of  Labor  and  Exchange. — ^As  has  been  said, 
most  of  us  produce  one  commodity  or  part  of  a  commodity, 
or  render  some  personal  service.  We  are  paid  in  money 
and  then  we  exchange  our  money  for  the  things  we  want. 
Every  one  of  us  is  dependent  upon  others.  Even  the 
lonely  backwoodsman  who  gets  his  living  by  hunting  and 
fishing  is  dependent  upon  thousands  of  others  for  his  rifle, 
sugar,  tobacco,  coffee,  and  clothes. 

Freedom  of  Labor. — Laborers  are  free  to  move  from  one 
part  of  the  country  to  another  and  may  choose  whatever 
employment  they  prefer.  Under  normal  conditions  la- 
borers seek  the  most  remunerative  opportunities  open  to 
them.  If  any  trade  or  profession  is  overcrowded  the  pay 
to  those  engaged  in  it  will  fall  and  the  workmen  will  seek 
other  employments.  So  on  the  other  hand  if  a  great  de- 
mand exists  for  some  service  or  commodity,  the  remunera- 


CHARACTERISTICS   OF   MODERN   SOCIETY         13 

tion  for  those  providing  it  will  rise  high  enough  to  attract 
the  laborers  who  are  needed.  For  example,  when  the 
World  War  began,  the  high  wages  offered  by  manufacturers 
of  munitions  of  war  attracted  laborers  from  other  factories 
and  from  the  farms.  When  the  war  closed,  the  demand 
for  munitions  ceased  and  labor  sought  other  employ- 
ment. 

Freedom  of  Capital. — ^Also  there  is  freedom  to  invest 
capital  in  most  industries.  Large  profits  in  any  industry 
attract  new  capital  to  that  industry.  Small  profits  result 
in  capital  seeking  other  industries.  The  tendency  is, 
therefore,  for  profits  to  become  uniform  in  all  industries. 
For  example,  a  few  years  ago  those  who  were  engaged  in 
the  making  of  automobiles  enjoyed  large  profits.  This 
attracted  capital  into  the  automobile  industry  and  com- 
petition between  manufacturers  lowered  the  price  of  cars 
and  profits  diminished. 

Restrictions  on  Freedom  of  Labor  and  Capital. — This 
freedom  of  labor  and  capital  has  not  always  existed.  Un- 
til after  the  French  Revolution,  which  began  in  1789,  both 
labor  and  capital  were  so  restricted  in  France  as  to  prevent 
laborers  from  moving  from  place  to  place,  and  capital  was 
subject  to  many  restrictions.  Similar  limitations  on  the 
freedom  of  labor  and  capital  existed  in  other  coun- 
tries. 

After  the  French  Revolution  the  old  restrictions  on  labor 
and  capital  were  removed,  but  some  new  ones  came  into 
existence.  The  old  restrictions  upon  labor  were  in  the 
interests  of  the  employers ;  the  new  ones  were  in  the  interest  1 
of  the  laborers.  Laws  limiting  the  hours  of  work,  requiring 
one  day  of  rest  each  week,  prohibiting  child  labor,  pro- 


14  THE   ELEMENTS   OF   ECONOMICS 

tecting  the  workman  from  dangerous  conditions  are 
examples  of  restrictions  that  are  advantageous  to  the 
laborers. 

Freedom  to  engage  in  some  employments  is  restricted  by 
law.  Capital  cannot  be  invested  in  industries  which  pro- 
duce goods  for  harmful  purposes.  The  manufacture  and 
sale  of  intoxicating  beverages  is  restricted  in  the  United 
States.  Other  industries,  like  the  post-office,  may  be 
operated  only  by  the  government.  Exclusive  patent  and 
copyright  privileges  limit  competition  in  certain  industries. 
All  these  restrictions  are  made  because  they  are  in  the 
interest  of  the  people. 

Though  there  is  legal  freedom  to  engage  in  most  lines  of 
business,  this  freedom  may  be  restricted  in  other  than  legal 
ways.  Capital  seldom  ventures  into  a  field  monopolized 
by  some  powerful  corporation  or  combination  of  corpora- 
tions. As  an  illustration  we  may  take  the  meat-packing 
industry  of  the  United  States.  Many  millions  of  dollars 
are  invested  by  each  of  the  packing  companies  and  each 
has  built  a  great  business  with  agencies  throughout  America. 
Capitalists  would  hesitate  before  entering  the  meat-packing 
industry  because  that  field  is  already  occupied  by  powerful 
corporations. 

Competition. — The  prevalence  of  competition  in  all  in- 
dustry is  well  illustrated  in  the  following  quotation  from 
Professor  Fairbanks's  Introduction  to  Sociology:  *'The 
manufacturer  of  cotton  goods  chooses  between  competing 
places  for  his  factory;  the  makers  of  his  machinery  are 
vying  with  each  other  to  produce  most  economically  the 
engines,  looms,  etc.,  that  are  best  adapted  to  his  work; 
raw  products  he  buys  from  sellers  competing  in  the  open 


CHARACTERISTICS   OF   MODERN   SOCIETY         15 

market;  labor  he  hires  from  among  men  who  bid  against 
each  other  for  his  work;  transportation  companies  com- 
pete with  one  another  in  cheaply  transferring  his  goods  to 
market;  and  in  the  market,  seller  is  struggling  with  seller 
for  the  privilege  of  a  sale  with  profit;  buyer  and  seller  bar- 
gain together,  to  agree  on  a  price.  The  present  century 
has  seen  barrier  after  barrier  swept  away,  till  the  whole 
world  enters  more  or  less  freely  into  one  struggle;  family 
and  social  distinctions  are  being  obliterated  in  the  indus- 
trial world;  customs  and  laws  in  restraint  of  trade  have 
been  set  aside.'' 

At  its  best  competition  seeks  to  render  a  better  service  \ 
at  a  lower  price.  It  eliminates  the  incompetent  and  lazy, 
and  this  is  a  social  service.  Competition  does  not  neces- 
sarily lead  to  monopoly,  as  business  ai)ility  and  resource- 
fulness are  not  limited  to  a  few.  Fair  competition  is  a 
''live  and  let  live"  competition,  but  there  is  also  an  unfair 
competition  which  seeks  to  drive  its  rivals  out  of  business 
by  any  means,  fair  or  unfair.  Misrepresentation  by  a 
rival,  securing  trade  secrets  by  bribery  of  employees, 
*' planting"  a  man  in  a  rival's  establishment  to  secure 
knowledge  of  his  business,  and  temporarily  lowering  prices 
below  the  cost  of  production  to  drive  a  rival  out  of  busi- 
ness are  all  examples  of  unfair  competition.  In  many 
states  local  laws  are  directed  against  unfair  competition 
and  the  Federal  Trade  Commission  is  empowered  to  pre- 
vent unfair  competition  by  those  engaged  in  interstate 
commerce.  Fair  competition  is  the  rule  in  America.  Most 
business  men  treat  their  competitors  as  they  expect  to  be 
treated.  An  unfair  competitor  is  soon  discovered  and  finds 
that  fair  competition  is  the  best  policy.  •  Business  ethics  is 


i6  THE   ELEMENTS   OF   ECONOMICS 

nowhere  higher  than  in  the  United  States,  and  probably 
was  never  so  high  as  now. 

Monopoly.  —  Various  corporations  producing  similar 
goods  may  unite.  If  the  combination  controls  all  or  a 
great  part  of  the  production  it  is  a  monopoly.  Some 
monopolies  exist  because  of  the  control  of  the  source  of 
supply.  An  example  of  this  is  the  anthracite  coal  mo- 
nopoly. Others  exist  because  of  ownership  of  patents, 
and  some  others  owe  their  existence  to  the  fact  that  the 
services  they  render  can  best  be  supplied  under  monopoly 
conditions.  Examples  of  this  latter  class  are  the  gas  com- 
panies and  other  public-service  corporations. 

Custom. — Custom  plays  an  important  part  in  economic 
life.  We  become  used  to  a  certain  standard  of  living  and 
wish  to  hold  to  it.^  For  example,  custom  prescribes  that 
some  people  shall  take  a  two  weeks'  vacation  in  the  sum- 
mer, that  they  shall  give  and  receive  presents  at  Christmas, 
or  that  a  new  hat  be  bought  for  Easter.  In  many  com- 
munities merchants  are  accustomed  tb  subscribe  definite 
sums  each  year  to  local  charities.  In  parts  of  the  South 
custom  prescribes  that  certain  occupations  shall  be  followed 
by  negroes  exclusively. 

Retail  prices  are  governed  largely  by  custom.  People 
pay  the  traditional  price  and  buy  in  the  usual  quantities. 
Customs  are  not  the  same  throughout  the  country.  In 
some  cities  it  is  customary  to  buy  groceries  in  small  quan- 
tities, and  potatoes  are  sold  by  weight;  in  other  parts  of 
the  country  potatoes  are  seldom  sold  in  smaller  quantities 
than  a  peck.  Custom  causes  white  eggs  to  command 
higher  prices  in  some  cities  than  brown  eggs,  but  in  other 
cities  brown  eggs  are  preferred.     In  France  it  is  the  cus- 


CHARACTERISTICS   OF   MODERN   SOCIETY         17 

torn  of  the  peasants  to  save  something  each  year  and  to 
invest  the  savings  in  stocks  and  bonds. 

Every  one  of  us  is  influenced  by  custom.  Some  customs 
are  good,  others  harmful.  Economic  progress  comes  from 
acquiring  good  economic  customs  and  changing  bad  ones. 

Summary. — Private  property  is  the  rule  in  modern  in- 
dustry. This  is  because  it  is  to  the  advantage  of  most 
people.  Some  industries  are  owned  and  operated  by  the 
people  through  their  representatives.  For  example,  the 
postal  service  of  the  United  States  is  owned  and  operated 
by  the  national  government  and  most  cities  own  and 
operate  their  waterworks.  Whether  any  kind  of  business 
should  be  publicly  or  privately  owned  depends  upon  which 
method  will  serve  the  people  better.  As  a  rule  people  may 
enter  any  kind  of  business  they  wish,  but  in  some  profes- 
sions there  are  legal  restrictions  to  prevent  incompetent 
men  from  doing  business.  For  example,  men  may  not 
practise  medicine  until  they  satisfy  the  state  authorities 
that  they  possess  the  proper  qualifications.  Competition 
is  the  rule  in  most  business  enterprises.  Competition  is 
beneficial  when  it  is  a  fair  competition,  but  it  is  subject  to 
abuse.  State  and  national  laws  exist  to  check  unfair  com- 
petition- and  to  encourage  fair  competition.  Monopoly  is 
the  absence  of  effective  competition. 

Custom  plays  a  large  part  in  the  life  of  every  one  of  us. 
We  eat  fish  on  Friday  and  chicken  on  Sunday,  go  to  a  ball- 
game  on  Saturday  afternoon,  and  read  the  morning  paper 
every  day.  These  are  customs,  and  each  has  an  economic 
influence. 


i8  THE  ELEMENTS   OF  ECONOMICS 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1.  Sociologists  say  that  most  people  should  try  to  own  their  own 

homes.  Do  you  agree?  Why?  What  agencies  are  there 
to  help  people  own  their  own  homes?  Why  do  more  people 
own  their  own  homes  in  Philadelphia  than  in  New  York? 
In  Indianapolis  than  in  Chicago?  In  the  country  than  in 
the  cities? 

2.  Should  the  amount  of  inheritances  be  limited  by  law?    If  so^ 

what  should  be  the  limit?  Show  some  instances  in  which 
inherited  property  has  been  a  benefit  to  the  recipient  and 
to  society.  Show  some  evils  that  have  resulted  from  in- 
herited property. 

3.  Why  should  a  man  be  compelled  to*pass  an  examination  before 

he  can  practise  medicine  ?  Why  should  he  not  be  required 
to  pass  an  examination  before  opening  a  grocery  store? 
Many  states  require  a  year  or  more  study  in  college  before 
a  person  may  begin  the  study  of  medicine  in  a  medical 
college.     Is  this  a  reasonable  restriction?     Why? 

4.  Give  some  examples  of  customs   that   have  an   effect  upon 

economic  life  in  your  community.  What  customs  are  bene- 
ficial to  the  community  as  a  whole?  What  customs  are 
harmful  ? 

5.  What  are  the  economic  results  of  the  custom  of  giving  presents 

at  Christmas?  What  considerations  other  than  economic 
ones  enter  into  the  giving  of  Christmas  presents? 


CHAPTER  III 

WANTS  AND  THEIR  SATISFACTION 

» 
Elementary  Wants. — The  most  elementary  wants  for 
every  one  of  us  are  food,  drink,  clothing,  and  shelter. 
Man  shares  these  wants,  except  clothing,  with  the  animals. 
Primitive  men  were  satisfied  with  the  simplest  things. 
With  an  increase  in  civilization  the  elementary  wants  be- 
came refined.  Food  and  drink  must  be  clean  and  attrac- 
tively served.  Clothing  and  shelter  must  be  pleasing  to 
the  eye. 

Cultural  Wants. — Every  advance  in  civilization  has 
brought  new  wants.  An  ability  to  read  develops  into  a 
desire  to  read  and  appreciate  the  best  literature,  not  only 
in  one  language  but  in  several.  A  love  of  music,  once 
satisfied  by  the  beating  of  tom-toms  or  a  jazz  band,  be- 
comes a  love  for  symphony  concerts,  or  other  forms  of 
music  which  are  really  music  to  a  cultured  taste.  A  mul- 
titude of  wants  arise,  such  as  travel,  study,  art,  and  social 
service.  Fortunately  these  wants  can  in  many  cases  be 
suppHed  even  to  those  whose  wealth  is  very  limited,  and 
culture  does  not  always  vary  directly  with  a  person's  in- 
crease in  wealth.  It  is  a  well-known  fact  that  in  the  great 
opera-houses,  the  poor  man  in  the  gallery  often  more  keenly 
enjoys  the  performance  of  a  grand  opera  than  does  the 
occupant  of  an  orchestra  seat.  The  want  of  religious  con- 
solation, present  in  an  elementary  way  in  a  savage,  be- 
comes to  many  persons  of  refinement,  a  most  important 

19 


20  THE   ELEMENTS   OF   ECONOMICS 

want,  and  for  its  satisfaction  vast  sums  of  money  are 
expended. 

As  old  wants  are  satisfied,  new  ones  appear.  Were  this 
not  the  case,  life  would  hardly  be  worth  the  living.  We 
no  sooner,  for  example,  learn  the  use  of  a  rowboat,  than 
we  want  a  sailboat,  then  a  motor-boat.  Seeing  others 
receiving  pleasure  incites  us  to  desire  to  imitate  them.  It 
was  a  brave  man  who  ate  the  first  raw  oyster,  but  he  gave 
indications  of  enjoyment  and  soon  eating  oysters  became 
popular. 

Education  causes  a  host  of  wants  to  arise.  The  study 
of  literature  causes  the  desire  to  own  books  and  to  subscribe 
for  a  literary  magazine;  a  growth  of  the  artistic  sense  pre- 
vents one  from  being  satisfied  with  the  crude  art  of  the 
Sunday  papers  and  leads  to  a  desire  to  possess  reprints  of 
works  of  art.  The  educational  process  is  to  a  large  degree 
the  refinement  of  old  wants  and  the  creating  of  new  ones. 

Advertising  Creates  Wants. — ^Advertising  not  only  tells 
us  where  goods  may  be  obtained,  it  also  creates  a  desire  to 
possess  these  goods.  A  new  automobile,  operating  on  a 
new  principle,  is  advertised  and  at  once  some  persons  want 
to  see  it  and,  if  the  demonstration  is  satisfactory,  to  secure 
one.  The  newspapers  announce  a  new  breakfast  food  and 
the  billboards  blazen  its  catchword,  and  thousands  buy 
it  to  see  what  it  is  like. 

Goods. — Whatever  satisfies  a  human  want  is  a  good.  Its 
want-satisfying  capacity  is  called  utility.  All  goods  are 
known  as  wealth,  and  the  term  is  not  limited  to  great  riches. 
The  peddler's  cart  is  wealth  just  as  much  as  is  the  million- 
aire's automobile.  Personal  services  such  as  those  of  a 
physician  satisfy  wants  and  are  utilities. 


WANTS   AND   THEIR   SATISFACTION  21 

Free  Goods  and  Economic  Goods. — Some  goods  are  fur- 
nished in  such  quantities  by  nature  that  there  is  enough 
for  all  and  to  spare.  These  goods  are  known  as/r^e  goods. 
Air  and  water  are  examples  of  free  goods.  Free  goods 
decrease  in  number  with  growth  of  population  and  fuller 
occupation  of  the  land.  In  colonial  times  wood  for  fuel 
was  so  abundant  that  any  one  could  have  it  who  would 
take  the  trouble  to  cut  down  a  tree;  game  was  plentiful 
and  was  often  given  away.  Economic  goods  are  limited 
in  amount  and  are  secured  only  after  an  effort.  Under 
certain  conditions  goods  which  are  usually  free  goods  may 
become  economic  goods  and  vice  versa.  Water,  if  it  be- 
come so  scarce  as  to  be  difficult  to  obtain,  may  be  an 
economic  good.  An  unusually  large  crop  of  apples,  where 
shipping  facilities  are  lacking,  may  make  apples  so  abun- 
dant as  to  be  free  to  any  one  who  desires  them. 

The  Consumption  of  Goods. — The  consumption  of  goods 
means  the  using  up  or  destroying  their  utilities.  Some 
goods  are  destroyed  in  satisfying  a  single  want;  such  goods 
are  known  as  perishable  goods.  Other  goods,  like  a  wagon, 
may  satisfy  many  wants  before  becoming  unserviceable, 
and  such  goods  are  called  durable  goods.  Few  goods  are 
absolutely  durable,  though  land  might  be  so  called  in  some 
respects,  as  its  supporting  power  is  not  destroyed,  though 
every  farmer  knows  that  if  it  is  not  enriched  at  intervals 
its  productive  power  wears  out. 

Present  and  Future  Goods. — Future  wants  are  usually 
less  highly  regarded  than  present  wants,  and  finished  prod- 
ucts which  are  able  to  satisfy  a  present  want  are  more 
highly  esteemed  than  goods  which  will  be  available  for  use 
only  at  some  future  time.     Most  persons  would  prefer 


22  THE  ELEMENTS   OF   ECONOMICS 

$ioo  at  the  present  time  rather  than  |ioo  six  months  from 
now.  The  future  is  always  uncertain;  of  the  present  alone 
we  may  be  sure. 

Useful  and  Harmful  Consumption. — Any  use  of  goods 
which  aids  a  person  physically  or  morally  is  a  useful  con- 
sumption. For  example,  if  a  laboring  man  spends  a  Satur- 
day afternoon  at  a  ball-game  and  comes  home  with  his 
nerves  rested  and  a  good  appetite  for  dinner,  the  time  and 
money  may  have  been  spent  to  advantage.  A  night  of 
dissipation  on  the  other  hand  leaves  a  man  unfit  for  work 
the  next  day  and  is  not  an  economic  use  of  time  or  money. 
The  spending  of  money  upon  harmful  drugs  or  whiskey  is 
uneconomic  because  the  use  of  these  articles  reduces  ability 
to  work,  but  reasonable  expenditures  for  recreation  of  a 
wholesome  kind  increase  ability  to  work  and  are  therefore 
economic. 

Public  Wealth. — Our  wants  are  satisfied  not  alone  by 
the  possession  of  private  property.  Public  property  satis- 
fies many  wants.  Public  roads,  parks,  bridges,  art  gal- 
leries, museums,  schools,  and  hospitals  are  examples  of 
public  wealth.  Another  variety  of  public  wealth  is  such 
natural  wealth  as  rivers,  lakes,  harbors,  and  public  forests. 
Public  wealth  belongs  to  all  of  us  collectively,  and  it  should 
be  a  matter  of  concern  to  all  citizens  that  public  property 
should  not  suffer  at  their  hands  and  that  they  do  not  allow 
others  to  injure  it  without  their  protest.  To  disregard 
signs  requesting  people  not  to  walk  on  the  grass,  to  injure 
shrubbery  in  a  park,  or  carelessly  to  cause  a  forest  fire  are 
offenses  which  a  good  citizen  never  commits. 

Summary. — Elementary  wants  are  those  for  food,  drink, 
clothing,    and    shelter.     Even   primitive   men   had    these 


WANTS   AND   THEIR   SATISFACTION  23 

wants.  As  civilization  increased  these  wants  became  re- 
fined and  cultural  wants  appeared.  Wants  are  satisfied 
by  goods  and  services.  Some  goods  are  furnished  by  nature 
in  such  abundance  that  they  are  free  to  all  men.  Others 
are  limited  in  quantity  and  an  effort  is  required  to  secure 
them.  These  goods  are  economic  goods.  In  satisfying 
wants  goods  are  consumed.  Goods  that  are  destroyed  in 
satisfying  a  single  want  are  perishable  goods.  Goods  that 
satisfy  a  series  of  wants  are  durable  goods.  Useful  con- 
sumption of  goods  is  any  use  of  goods  which  gives  pleasure 
or  satisfaction  without  harm  to  the  body  or  mind. 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1.  Why  are  breakfast  foods  and  crackers  usually  sold  in  boxes 

rather  than  in  bulk  ?     Is  the  extra  expense  justified  ? 

2.  Show  that  a  man's  place  in  the  scale  of  civilization  is  deter- 

mined by  the  nature  of  his  wants. 

3.  Even  a  savage  enjoys  music,  but  we  are  told   that  the   best 

music  is  appreciated  only  by  those  who  have  a  cultivated 
taste.  How  does  a  jazz  band  compare  with  a  symphony 
orchestra  ?  What  agencies  for  the  promotion  of  good  music 
exist  in  your  community  ? 

4.  Give  some  examples  from  your  own  experience  of  goods  which 

are  ordinarily  economic  goods  becoming  free  goods.  What 
goods  which  were  once  free  goods  in  your  community  are 
now  economic  goods? 

5.  Under  what  circumstances  may  it  be  an  economic  expenditure 

of  time  and  money  to  attend  a  moving-picture  show  ?  When 
would  it  be  uneconomic? 


CHAPTER  IV 
CONSUMPTION  OF  WEALTH  FURTHER  CONSffiERED 

The  Law  of  Satiety. — ^At  any  one  time  any  want  is  capa- 
ble of  being  completely  satisfied,  or  satiated.  For  example, 
a  person  may  be  exceedingly  hungry.  A  piece  of  bread 
would  be  devoured  eagerly  and  this  might  be  followed  by 
other  pieces  until  the  time  would  come  when  the  desire  for 
bread  would  be  satiated.  The  total  utility  of  the  bread  to 
this  person  would  be  the  utility  derived  from  all  the  slices 
he  had  eaten  in  satisfying  his  hunger. 

The  Law  of  Diminishing  Utility. — The  satisfaction  from 
the  first  slice  of  bread  would  be  great.  Let  us  indicate  it 
by  the  numeral  lo.  The  second  slice  would  give  less 
satisfaction,  which  may  be  indicated  by  the  numeral  9. 
Each  subsequent  slice  would  be  less  desired,  until  the 
tenth  slice  would  give  only  a  satisfaction  which  would  be 
expressed  by  the  numeral  i.  After  consuming  ten  slices, 
no  more  bread  is  desired,  the  point  of  satiety  has  been 
reached.  The  utility  of  the  last  piece  eaten  is  the  marginal 
iitility,  that  is,  the  piece  which  yields  the  least  satisfaction. 
The  following  table  shows  total  utility  and  marginal  utility 
in  the  illustration  of  the  successive  slices  of  bread: 

Units  of  Bread  Satisfaction  Derived 

10 

9 
8 


24 


CONSUMPTION   OF   WEALTH  25 

Units  of  Bread  Satisfaction  Derived 

5 
4 
3 

2 

I  marginal  utility 

Total  Units     10  Total  Utility     55 

Of  course,  if  the  consumption  of  bread  stopped  short  of 
the  point  of  satiety,  the  total  and  marginal  utility  would 
be  otherwise.  For  example,  if  only  five  slices  of  bread 
were  consumed,  as  will  be  seen  by  the  figures,  the  total 
utility  would  be  40  and  the  marginal  utihty  would  be  6. 
To  consume  more  bread  than  the  ten  slices  would  be  posi- 
tive discomfort,  or  disutility. 

The  law  of  diminishing  utility  applies  to  all  things.  To 
the  lover  of  music  a  symphony  concert  is  a  great  pleasure, 
but  after  listening  to  a  concert  for  two  hours,  the  desire  for 
music  is  for  the  time  satisfied  and  additional  concerts  fol- 
lowing at  once  would  be  a  disutility.  The  same  rule  ap- 
plies to  material  objects  which  render  a  series  of  satis- 
factions. One  phonograph  might  be  intensely  desired; 
another  of  the  same  kind  would  not  be  a  cause  of  much 
satisfaction;  while  a  third  would  not  be  wanted  in  the 
same  household. 

The  Law  of  Variety. — Since  we  cannot  have  everything 
we  want,  we  spend  our  money  for  those  things  which  we 
want  the  most.  There  is  a  constant  balancing  of  the 
advantages  afforded  by  one  kind  of  expenditures  over 
those  which  might  be  afforded  by  another.  We  must 
often  choose  between  present  wants  and  future  wants.  A 
prudent  person  who   cannot  enjoy  a  summer  vacation. 


26 


THE  ELEMENTS  OF  ECONOMICS 


except  at  the  expense  of  being  without  coal  during  the 
coming  winter,  will  forego  his  vacation. 

Every  satisfaction  costs  something  in  terms  of  other 
possible  enjoyments;  not  only  is  this  the  case,  but  there  is 
a  balancing  of  the  pleasure  of  consumption  against  the 
pain,  or  discomfort,  of  additional  production.  By  working 
overtime  a  person  might  gain  income  for  increased  con- 
sumption, but  he  may  decide  that  the  extra  effort  is  not 
worth  while. 

The  Economic  Order  of  Consumption. — The  consump- 
tion of  a  good  is  seldom  continued  to  the  point  of  satiety; 
greater  satisfaction  is  afforded  by  stopping  short  of  the 
point  of  satiety  in  any  one  good  and  consuming  other 
goods.  Thus  if  a  person  had  seventy-five  cents  to  spend 
for  his  dinner,  he  would  not  spend  it  all  upon  bread. 
The  more  economic  order  would  be  to  use  part  for  potatoes, 
meat,  colTee,  and  a  dessert.  Thus  we  might  divide  the 
seventy-five  cents  into  ten  units  of  7.5  cents  each  and  the 
economic  order  of  consumption  would  be  somewhat  like 
the  following: 


Commodities 

Bread 

Potatoes 

Meat 

Dessert 

Coffee 

9 

10 

12 

10 

9 

9 

II 

10 

9 

9 

In  this  case  7.5  cents  would  be  spent  for  bread;  15  cents 
for  potatoes;  30  cents  for  meat;  15  cents  for  dessert;  and 
7.5  cents  for  coffee.     The  marginal  utility  is  9  in  each 


CONSUMPTION   OF   WEALTH  27 

commodity  and  the  total  utility  of  all  the  commodities 
is  98. 

Consumer's  Goods  and  Producer's  Goods. — Some  goods 
are  used  to  satisfy  wants.  These  are  called  consumers' 
goods.  Others  are  used  in  the  production  of  more  goods. 
These  are  producers'  goods.  Coal  which  is  used  to  heat  a 
dwelling  is  a  consumers'  good;  if  used  to  produce  power 
to  run  a  factory  it  is  a  producer's  good.  In  a  later  chapter 
we  shall  discuss  producers'  goods.  Consumers'  goods  may 
be  classified  as  necessaries,  comforts,  and  luxuries. 

Necessaries. — Necessaries  are  those  goods  which  must 
be  consumed  in  order  to  preserve  health  and  strength. 
There  should  also  be  included  those  goods,  which  although 
not  necessary  in  a  physical  sense,  are  necessary  in  order 
to  preserve  self-respect.  '*A  linen  shirt,  for  example,  is, 
strictly  speaking,  not  a  necessary  of  life.  The  Greeks  and 
Romans  lived,  I  suppose,  very  comfortably,  though  they 
had  no  linen.  But  in  the  present  time,  through  the  greater 
part  of  Europe,  a  creditable  day-laborer  would  be  ashamed 
to  appear  in  public  without  a  linen  shirt,  the  want  of 
which  would  be  supposed  to  denote  that  disgraceful  degree 
of  poverty  which  it  is  presumed  nobody  can  well  fall  into 
without  extreme  bad  conduct.  Custom,  in  the  same 
manner,  has  rendered  leather  shoes  a  necessary  of  life  in 
England.  The  poorest  creditable  person  of  either  sex 
would  be  ashamed  to  appear  in  public  without  them.  In 
Scotland  custom  has  rendered  them  a  necessary  of  life  to 
the  lowest  order  of  men,  but  not  to  the  same  order  of 
women,  who  may,  without  any  discredit,  walk  about  bare- 
footed. Under  necessaries,  therefore,  I  comprehend,  not 
only  those  things  which  nature,  but  those  things  which 


28  THE   ELEMENTS   OF   ECONOMICS 

I  the  established  rules  of  decency  have  rendered  necessary 
to  the  lowest  rank  of  people."  * 

Comforts. — The  dividing-line  between  necessaries  and 
comforts  is  not  easy  to  find.  Comforts  are  not  necessary 
for  existence,  nor,  perhaps,  for  self-respect,  yet  most  people 
regard  comforts  as  essential  to  a  reasonable  standard  of 
living.  A  straw  hat  in  August  is  not  a  necessity  and  its 
absence  would  not  be  seriously  felt,  but  most  men  regard 
it  as  almost  a  necessity.  A  second  suit  of  clothes  may 
not  be  a  necessity,  but  would  be  a  comfort.  Pictures  to 
adorn  the  walls  and  cushions  for  the  chairs  might  also  be 
classified  as  comforts,  though  if  unusually  fine  they  might 
be  luxuries. 

Luxuries. — ^Luxury  may  be  defined  as  any  article  which 
ministers  to  comfort  or  pleasure,  and  yet  is  not  necessary 
to  Ufe  or  to  what  is  regarded  as  an  ordinary  degree  of 
comfort.  Luxury  does  not  increase  one's  ability,  although 
the  desire  to  secure  luxuries  may  be  a  motive  to  economic 
activity.  The  saying  is  old  and  true  that  the  luxuries  of 
one  generation  are  the  necessaries  of  the  next,  which  means 
that  increased  production  makes  it  possible  to  satisfy  new 
wants  without  sacrificing  essentials.  What  is  a  luxury 
for  one  person  may  be  a  necessity  for  another.  An  old 
and  valuable  violin  might  be  a  luxury  for  an  amateur,  but 
a  necessity  for  a  professional  violinist.  An  automobile  is 
a  necessity  for  many  physicians  but  may  be  a  luxury  for 
a  college  professor.  One  class  of  luxuries  deserves  con- 
demnation and  to  this  class  belong  those  luxuries  which 
gratify  only  the  sense  of  vanity  and  vulgar  display. 

*  Adam  Smith,  The  Wealth  of  Nations. 


CONSUMPTION   OF  WEALTH  29 

Luxuries  do  Not  Increase  Demand  for  Labor. — We  fre- 
quently hear  the  remark  that  the  lavish  expenditure  of 
money  for  a  ball  or  some  other  luxury  is  not  without  its 
advantages;  it  gives  employment  to  labor.  This  is  quite 
analogous  to  the  oft-heard  statement  that  the  burning  of  a 
building  means  that  masons  and  carpenters  will  now  have 
a  job.  In  the  case  of  the  house,  society  is  poorer  for  the 
loss  of  the  house,  even  though  the  insurance  company  pays 
the  loss  and  in  this  case  the  insurance  company  must  re- 
strict its  investments  elsewhere  to  pay  the  loss.  In  the 
case  of  luxury  there  is  a  demand  for  the  labor  which  pro- 
duced the  luxury,  but  the  expenditure  probably  would 
have  been  made  elsewhere  if  not  for  luxury,  and  even  if 
the  money  had  remained  in  the  bank,  the  bank  could  have 
loaned  it  for  some  useful  purpose. 

This  whole  subject  is  discussed  most  entertainingly  by 
Doctor  R.  T.  Ely.. 

*' Shallow  as  he  was,  Frederic  Bastiat  undoubtedly  said 
many  good  things,  and  is  entitled  to  our  gratitude  for 
having  cleared  up,  as  no  one  else,  some  of  the  first  princi- 
ples of  economics.  Perhaps  one  of  his  happiest  efforts  was 
his  exposition  of  the  difference  in  industrial  society  be- 
tween that  which  is  seen  and  that  which  is  not  seen.  A 
worthy  shopkeeper,  Jacques  Bonhomme,  is  enraged  be- 
cause his  careless  son  breaks  a  pane  of  glass,  while  the 
spectators  who  gather  around  the  scene  offer  this  conso- 
lation to  the  father:  'It  is  an  ill  wind  that  blows  nobody 
good.  Everybody  must  live,  and  what  would  become  of 
the  glaziers  if  panes  of  glass  were  never  broken.'  Who 
among  my  readers  has  not  heard  similar  expressions  of 
opinion?    And  how  many  of  them  are  there  who  do  not 


so  THE  ELEMENTS   OF  ECONOMICS 

feel  that  there  is  a  certain  justice  in  the  view  of  the  indif- 
ferent but  good-natured  spectators?  .  .  . 

''Jacques  Bonhomme,  the  shopkeeper,  was  just  on  the 
point  of  ordering  a  new  pair  of  shoes  for  his  wife,  for  which 
he  expected  to  pay  six  francs.  These  shoes  he  is  now  un- 
able to  order  on  account  of  his  loss,  and  the  shoemaker 
misses  his  opportunity  to  earn  six  francs.  This  is  what  is 
not  seen,  but  it  is  beyond  all  controversy  that  no  addi- 
tional employment  has  been  given  to  labor  because  the 
careless  son  broke  the  pane  of  glass.  .  .  .  My  good  friend 
who  spends  two  hundred  dollars  on  a  single  dress  sees  em- 
ployment given.  She  does  not  perceive  that  if  she  had 
given  twenty  calico  dresses  to  as  many  poor  old  ladies, 
quite  as  much  work  would  have  been  given  to  sewing- 
women.  Extravagance  finds  no  justification  on  the  plea 
that  it  gives  employment  to  labor."  * 

Family  Budgets. — ^A  family  is,  among  other  things,  a 
business  concern  and  as  such  it  should  keep  an  account  of 
income  and  expenses.  A  well-managed  family,  from  a 
business  point  of  view,  will  calculate  its  income  and  appor- 
tion its  expenses  so  that  they  will  fall  within  the  income. 
This  calculating  of  income  and  arranging  of  expenses  is 
called  making  a  budget.  A  budget  should  always  include 
savings,  and  a  budget  makes  savings  possible  by  eliminating 
much  foolish  spending.  If  the  average  family  could  see 
the  total  amount  spent  yearly  upon  matters  of  little  im- 
portance, it  would  speedily  effect  a  reform.  Unfortunately 
few  families  keep  accurate  accounts  of  their  expenses;  they 
know  some  of  the  great  expenses  such  as  those  for  rent  and 
fuel,  but  most  families  could  only  roughly  estimate  such 
*  Problems  of  To-Day,  chap.  XV. 


CONSUMPTION  OF  WEALTH 


31 


major  expenses  as  those  for  food  and  clothing.  Not  only 
are  the  facts  unknown  to  many  famihes,  but  the  investi- 
gator finds  that  his  inquiries  are  resented. 

In  1857,  Doctor  Ernst  Engel,  the  well-known  Prussian 
statistician,  published  the  result  of  his  investigations  in 
reference  to  family  budgets.  The  following  table  shows 
the  facts  which  Doctor  Engel's  studies  disclosed: 


Items  of  Expenditures 


Food 

Clothing 

Rent 

Fuel  and  light .  . 

Tools,  etc 

Education ...... 

Taxation 

Care  of  health . . 
Personal  service 


Per  Cent  of  Expenditure  of 


A  Laborer's 
Family 


62  1 

16 

12 

5 


95 
per  cent 


1    ' 

I  per  cent 


A  Middle-Class 
Family 


90 
per  cent 


10 
per  cent 


A  Family  of 
Wealth 


SO 
18 
12 

5 


85 
per  cent 


From  the  above  table  it  will  be  seen  that  a  German  laborer  with  an 
annual  income  of  $1,000  might  be  expected  to  spend  $620  for  food,  $160  for 
clothing,  $120  for  rent,  $50  for  fuel  and  light,  etc.,  $20  for  education,  $10 
for  taxes,  $10  for  care  of  health,  and  $10  for  personal  services.  A  man 
with  an  income  of  $3,000  per  year  would  spend  $1,650  for  food,  $540  for 
clothing,  $360  for  rent,  $150  for  fuel  and  lights,  etc.,  $105  for  education, 
$60  for  taxes,  $60  for  care  of  health,  and  $65  for  personal  services.  A  per- 
son with  an  income  of  $10,000  per  year  would  be  expected  to  spend  $5,000 
for  food,  $1,800  for  clothing,  $1,200  for  rent,  $500  for  fuel,  etc.,  $550  for 
education,  $300  for  taxes,  $300  for  care  of  health,  and  $350  for  personal 
services. 


Engel's  Law. — From  these  investigations  Doctor  Engel 
derived  the  following  four  deductions  which  are  known  as 
Engel's  Law: 


32 


THE   ELEMENTS   OF  ECONOMICS  ' 


1.  As  the  income  increases,  the  relative  expenditure  for 
subsistence  becomes  smaller. 

2.  The  percentage  of  expenditure  for  clothing  is  prac- 
tically the  same,  no  matter  what  be  the  income. 

3.  The  percentage  of  expenditure  for  rent,  and  for  fuel 
and  lights  is  constant. 

4.  As  the  income  increases,  the  percentage  spent  for 
education,  amusements,  health,  etc.,  constantly  increases. 

Since  Doctor  Engel's  day  many  investigations  of  family 
budgets  have  been  made,  among  the  most  notable  those 
of  the  United  States  Bureau  of  Labor  in  1891,  which  in- 
cluded over  2,000  families,  and  the  investigation  of  1903, 
which  included  over  11,000  families. 


AMERICAN  FAMILY  BUDGETS 
From  the  Annual  Report  of  the  Bureau  of  Labor  for  1903 


Family  Income 


Per  Cent  of  Total  Expenditure 


Food 


Clothing 


Rent 


Fuel  and 
Light 


Miscel- 
laneous 


Under  $200 

$20O-$30O 

$300-$400 

$400-$5oo 

$5oo-$6oo 

$6oo-$7oo 

$7oo-$8oo 

$8oo-$900 

$900-$!, 000.  . . . 
$i,ooo-$i,ioo. . 

$I,I00-$I,200.  . 

$1,200  and  over 


50- 

47. 

48, 

46. 

46. 

43.5 

41.4 

41.4 

39-9 
38.8 

37.7 
36.5 


10. 

II. 

12, 

12, 

13. 

13 

14- 

15. 

14, 

15. 


7 

16. 

•  7 

18. 

.0 

18. 

.4 

18. 

.0 

18. 

•9 

18. 

•S 

18. 

.6 

17. 

•4 

17. 

.1 

17- 

•9 

16 

7 

17 

8.0 

7.2 

7-1 

6.7 
6.2 
5.8 


15-6 
18.8 
16. 1 
16.5 
17.2 
19.4 
21.6 
23.0 
23.2 

23-7 
26. 1 

25-4 


These  budgets  and  others  seem  to  show  that  in  America 
Doctor  Engel's  conclusions  hold  in  reference  to  expendi- 


CONSUMPTION  OF  WEALTH  33 

tures  for  food;  are  true  in  the  main  in  regard  to  ex- 
penditures for  education,  amusements,  etc.,  are  very  nearly 
true  in  regard  to  rent,  but  are  not  to  be  accepted  in  re- 
gard to  clothing  and  fuel  and  light.  The  percentage 
spent  for  clothing  slowly  increases  in  the  United  States 
with  increased  income  and  the  percentage  for  fuel  and 
light  slowly  decreases. 

Some  Recent  Family  Budgets.* — In  191 7  a  board  of  arbi- 
tration was  appointed  to  determine  the  cost  of  living  in 
Seattle  and  Tacoma.  The  occasion  of  this  arbitration 
was  a  dispute  between  the  Puget  Sound  Traction,  Light, 
&  Power  Company,  the  Tacoma  Railway  &  Power  Com- 
pany, and  their  employees.  The  award  was  based  upon 
actual  studies  regarding  cost  of  living  and  provides  a 
*' minimum-comfort  budget"  based  upon  a  family  of  five, 
it  is  somewhat  higher  than  a  ''minimum-health  budget." 

MINIMUM-COMFORT  BUDGET  FOR  ONE  YEAR  FOR 
A  FAMILY  OF  FIVE 

Groceries,  meat,  fish  .* $533 .  40 

Fuel 60 .  00 

Clothing — man 90  •  5° 

Clothing — woman 87 .  00 

Clothing — girl  of  8  or  9 ,  32  •  5° 

Clothing — boy  of  14 48  •  5° 

Clothing — boy  of  5  or  6 33  •  00 

Mai^itenance  of  household  equipment 40 .  00 

Education 11. 00 

Church — fraternal  dues 20 .  00 

Medicine — doctor,  dentist 60.00 

Insurance 30 .  00 

Savings 100 .  00 

Gas 20.00 

Electric  light 15  00 

*  For  recent  family  budgets  see  Standards  of  Living,  a  Compilation  of 
budgetary  Studies,  Bureau  of  Applied  Economics,  Washington,  D.  C. 


34  THE   ELEMENTS  OF  ECONOMICS 

Rent  and  water $184 .  00 

Street-car  fare 35  ■  70 

Tobacco,  ice  cream 30 .  00 

Recreation — movies,  etc 30. 00 

Incidentals — stamps,  barber,  etc 25 .00 

Miscellaneous 20 .  00 

Total $1 ,505 .  60 

TOTAL  BUDGET     • 

Clothing $291 .  50 

Food 533  40 

Sundries 366 .  00 

Rent,  etc ; 3 14  •  70 

Total $1 ,505 .  60 

The  Bureau  of  Personal  Service  of  the  New  York  Board 
of  Estimate  and  Apportionment  presented  in  February, 
191 7,  a  budget  based  upon  the  cost  of  living  for  an  un- 
skilled laborer  in  New  York  City.  This  is  a  minimum- 
comfort  budget  and  is  for  a  family  of  five:  A  wage-earner, 
his  wife,  and  three  children;  all  the  children  are  of  school 
age  and  contribute  no  earnings  to  the  family.    (See  p.  35.) 

Minimum-Wage  Laws.  —  It  is  apparent  that  a  high 
standard  of  living  is  impossible  without  a  living  wage.  A 
proper  standard  of  living  must  include  a  dwelling-place, 
adequate  in  size  and  appointments,  good  food  in  sufficient 
amount,  clothing  suitable  for  each  season,  fuel  and  light, 
an  insurance  fund,  as  well  as  a  reasonable  expenditure 
for  recreation  and  culture.  Since  a  considerable  per- 
centage of  the  population  does  not  receive  a  large  enough 
wage  to  maintain  such  a  standard  of  life,  proposals  for  a 
minimum  wage  secured  by  law  have  frequently  been  made. 
These  proposals  do  not  imply  that  a  high  standard  of 
living  shall  at  once  be  introduced;  they  rather  look  toward 
the  abolishing  of  the  necessity  of  a  low  standard. 


CONSUMPTION   OF   WEALTH 


35 


MINIMUM-COMFORT  BUDGET  FOR  A  FAMILY  OF  FIVE 
IN  NEW  YORK  CITY 


191S 

1917 

I.     Housing 

$168.00 
30  30 
383-812 
104 . 20 

42.75 
20.00 
22.88 
73.00 

$168.00* 

30-30 
492.388 
127.10 

46.75 
20.00 
22.88 
73.00 

11.     Carfare 

III.     Food 

IV.     Clothing 

V.     Fuel  and  light 

VI     Health 

VII.     Insurance 

VIII.     Sundries 

Total  per  year 

$844,942 

$980,418 

$5  00 
40.00 

18.00 
500 

5-00 

Sundries  classified: 

Papers  and  other  reading  matter 

Recreation .... 

Furniture,    utensils,    moving    expenses, 
etc 

Church  dues 

Incidentals — soap,     washing     material, 
stamps,  etc. .             ... 

Total 

$73 -oo 

*  It  will  be  noted  that  the  rise  in  rents  did  not  begin  until  after  191 7. 


In  Victoria,  Australia,  minimum- wage  laws  were  first 
applied,  beginning  with  six  underpaid  trades  and  later  in- 
creased to  apply  to  one  hundred  and  forty-one.  More 
recently  minimum-wage  laws  have  been  introduced  in 
England.  In  both  of  these  countries  the  results  have 
been  approved  by  laborers  and  have  not  been  detrimental 
to  capital  as  had  been  anticipated.  The  minimum  wage 
does  not  mean  that  such  a  wage  must  be  the  maximum; 
of  course,  a  laborer  must  earn  his  minimum  wage,  or  lose 
his  job.     The  minimum  wage  tends  toward  making  the 


36  THE   ELEMENTS   OF   ECONOMICS 

laborer  efficient  enough  to  earn  it,  and  there  have  been  no 
wholesale  discharges  from  employment  in  Victoria  or  Eng- 
land on  account  of  the  law.  Minimum- wage  laws  are  not 
always  approved  by  labor-unions,  as  they  fear  the  mini- 
mum will  be  the  maximum,  but  this  fear  is  groundless. 
There  will,  however,  be  a  tendency  toward  replacing  labor 
by  machinery,  and,  generally,  a  slight  rise  in  price  to  con- 
sumers. If  a  minimum-wage  law  be  passed  it  must  be 
revised  at  frequent  intervals.  A  minimum  wage  adequate 
in  1 914  would  be  ridiculous  now,  and  a  law  fixing  a  mini- 
mum wage  now  might  make  it  too  high  to  be  fair  two 
years  from  now. 

In  the  United  States  minimum- wage  laws  are  not  re- 
garded with  approval.  The  labor  unions  prefer  to  make 
their  own  minimum-wage  laws,  and  unor^^anized  labor  is 
inarticulate.  The  State  can,  however,  by  being  a  model 
employer  of  labor  itself  set  the  standard  for  other  em- 
ployers. 

Though  there  has  been  no  experience  in  the  United 
States  with  general  minirnum-wage  laws,  twelve  states 
have  passed  laws  having  reference  to  minimum  wages  of 
women  and  children.  These  laws  are  not  supposed  to 
affect  the  general  standard  of  wages  but  to  require  that 
women  and  children  shall  not  work  for  less  than  a  living 
wage.  Some  of  these  states  have  fixed  a  minimum  rate  of 
wages  for  women  and  children;  others  have  created  com- 
missions which  decide  upon  a  proper  minimum  wage  and 
which  may  change  the  rate  as  the  cost  of  living  changes. 

The  constitutionality  of  minimum-wage  laws  is  not 
positively  determined.  A  decision  of  the  Supreme  Court 
of  the  United  States  involving  the  constitutionality  of  the 


CONSUMPTION   OF   WEAI.TH  37 

Oregon  law  was  handed  down  on  April  9,  191 7.  This 
decision  left  the  Oregon  law  unchanged  b}^  a  tie  vote,  Mr. 
Justice  Brandeis  not  voting,  as  he  had  represented  Oregon 
before  his  elevation  to  the  Supreme  Court,  when  the  case 
was  before  the  Supreme  Court  of  Oregon. 

Summary. — ^Any  want  is  capable  of  being  satisfied. 
With  each  additional  unit  of  any  good  consumed,  satis- 
faction becomes  less.  The  utility  of  the  last  unit  con- 
sumed is  the  marginal  utility.  Greater  total  satisfaction 
may  be  obtained  by  variety  in  consumption  than  by  con- 
suming one  good  until  the  point  of  satiety  is  reached. 
Family  budgets  show  the  relative  consumption  of  various 
articles  and  from  them  Professor  Engel  deduced  his  famous 
law.  A  high  standard  of  living  requires  a  proper  wage  and 
therefore  there  have  been  proposals  for  a  minimum-wage 
law.  Experiments  with  minimum-wage  laws  in  Victoria 
and  England  have  not  been  conclusive.  There  is  little 
demand  for  minimum- wage  laws  in  the  United  States. 
The  production  of  goods  is  determined  by  the  demand,  and 
consumers  may  determine,  to  a  large  extent,  the  conditions 
of  production.  Thrift  is  an  economic  virtue,  extrava- 
gance is  a  vice.  Necessaries  and  comforts  should  be  pre- 
ferred to  luxuries.  Luxuries  do  not  increase  the  demand 
for  labor. 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1.  Secure  a  number  of  family  budgets  from  members  of  your  own 

community.     See  how   these   compare   with   the   budgets 
presented  in  the  text. 

2.  Compare  expenses  for  sugar,  flour,  potatoes,  clothing,  and  rent 

in  your  community  in  1913,  1918,  and  at  the  present  time. 


38  THE   ELEMENTS   OF   ECONOMICS 

What  are  the  reasons  for  differences  in  cost  ?  Have  wages 
risen  and  fallen  in  proportion  to  prices  ? 

3.  In  an  automobile  factory  in  Detroit  there  is  a  minimum  wage 

of  $5  a  day.  If  this  wage  is  higher  than  the  average  in 
other  competing  factories  in  Detroit,  what  will  be  the 
effect  upon  them  ?  If  wages  are  higher  in  the  automobile 
factories  of  Detroit  than  in  those  of  Toledo,  what  will  be 
the  result,  (a)  upon  labor,  (b)  upon  the  cost  of  production  ? 

4.  What  is  a  luxury?     May  luxuries  ever  be  defended?     Is  a 

luxury  for  one  person  always  a  luxury  for  another  ?  Illus- 
trate this  by  some  examples. 

5.  Show  that  luxury  does  not  increase  the  demand  for  labor. 

What  effect  has  luxury  upon  the  demand  for  labor? 

6.  Arrange  a  minimum-comfort  budget  for  a  family  of  five  in 

your  community,  the  family  consisting  of  a  man  and  his 
wife,  a  boy  in  high  school,  a  girl  of  twelve,  and  a  boy  of 
five  years  of  age. 

7.  Does  it  require  a  larger  income  to  live  in  comfort  now  than 

when  your  father  was  a  boy  ?  Why  ?  Do  you  spend  more 
money  than  he  did  ?  Do  you  have'  a  better  time  than  he 
did?     Does  he  think  so? 

8.  What  items  of  expense  are  greater  in  the  country  than  in  the 

city  ?  What  articles  cost  less  in  the  city  ?  Show  the  rela- 
tive advantages  of  country  and  city  life. 

9.  Show  why  you  favor  or  oppose  minimum-wage  laws. 

10.     Find  the  opinion  of  local  labor  leaders  on  minimum- wage  laws. 


CHAPTER  V 
THE  PRODUCTION  OF  WEALTH 

Nature  of  Production. — Man  cannot  increase  the  ma- 
terial matter  of  the  earth.  He  can,  however,  so  change 
material  things  as  to  enable  them  to  satisfy  human  wants. 
This  process  of  changing  things  is  the  production  of  wealth. 
A  large  part  of  the  production  of  wealth  consists  of  putting 
things  into  a  form  in  which  they  will  satisfy  human  wants. 
This  is  known  to  the  economist  as  the  creating  of  Jorm\ 
utility.  Manufacturing  is  the  creation  of  form  utility. 
Iron  ore  satisfies  no  human  want,  but  commodities  which 
satisfy  wants  may  be  made  from  it.  Putting  goods  in  the 
place  in  which  they  may  satisfy  a  human  want  is  another 
process  in  the  production  of  wealth.  This  is  called  place 
utility.  Transportation  agencies  of  all  kinds  furnish  place 
utility. 

A  third  variety  of  utility  is  time  utility,  which  is  created 
by  those  who  furnish  the  goods  at  the  time  they  are 
wanted.  All  stores  and  storage  agencies  furnish  time  utili- 
ties. Before  most  goods  are  ready  for  use,  various  agen- 
cies have  contributed  form,  place,  and  time  utilities.  For 
example,  a  sheet  of  ice  covering  a  Maine  lake  in  Febru- 
ary would  not  render  an  economic  service.  Men  who  cut 
the  ice  into  cakes  of  convenient  size  for  transportation 
produce  form  utility,  the  storage-house  which  keeps  the 
ice  until  summer  creates  time  utility,  and  the  various  agen- 
cies which  place  it  where  it  can  be  used  produce  place 

39 


40  THE   ELEMENTS   OF   ECONOMICS 

utility.  Since  it  is  evident  that  goods  in  the  possession  of 
the  consumer  have  a  greater  value  than  before  they  reach 
the  consumer,  we  may  use  the  term  possession  utility  as 
applying  to  this  increased  utility,  and  all  agencies  which 
contribute  to  possession  utility  are  productive. 

Personal  Services. — Not  only  are  economic  services  ren- 
dered by  those  who  are  concerned  in  the  production  of 
material  things,  but  also  by  those  who  produce  utilities  of 
a  non-material  nature.  John  Stuart  Mill  divided  people 
into  two  classes,  producers  and  non-producers,  and  to  the 
latter  class  he  consigned  those  who  rendered  personal  ser- 
vices. However,  personal  services  satisfy  human  wants  of 
a  very  intense  nature  and  those  who  render  such  services 
are  producers  of  utilities.  For  example,  a  dentist,  when 
he  extracts  an  ulcerated  tooth,  renders  a  service  much  to 
be  desired  and  indirectly  he  aids  the  production  of  material 
things,  inasmuch  as  he  puts  the  laborer  upon  whom  he 
operates  in  a  condition  to  produce  material  commodities. 
Likewise  lawyers,  physicians,  teachers,  clergymen,  actors, 
servants,  and  all  others  who  render  personal  services,  pro- 
duce utilities  which  satisfy  human  wants,  and  each  of 
them,  in  one  way  or  another,  indirectly  aids  in  the  pro- 
duction of  material  goods. 

Non-Producers. — Unfortunately  every  community  has 
its  idle  classes,  those  of  an  age  at  which  they  should  be 
producers  who  are  simply  living  at  the  expense  of  others. 
This  class  does  not  include  those  who  are  still  completing 
their  education,  or  those  who  have  retired  from  active 
service,  having  earned  a  rest  after  years  of  toil.  Economics 
has  been  called  the  glorification  of  labor,  and  to  the  econ- 
omist the  idle  rich   and   the  idle  poor  alike  stand  con- 


THE   PRODUCTION   OF   WEALTH  41 

demned,  if  they  can  work  and  refuse  to  do  so.  No  honest 
labor  is  degrading  in  the  eyes  of  the  economist,  and  every 
loafer,  whether  rich  or  poor,  is  a  parasite.  Mere  acquisi- 
tion of  wealth  does  not  mean  production;  wealth  may  be 
obtained  by  fraud,  theft,  or  gambling,  but  such  acquisition 
is  without  the  rendering  of  useful  service  or  production  of 
utiHty.  Economic  progress  largely  consists  in  increasing 
the  per-capita  production  of  wealth,  as  it  is  obvious  that 
the  more  goods  produced,  the  more  will  be  available  for 
consumption. 

Factors  in  the  Production  of  Wealth. — Three  things  are 
essential  in  all  modern  production  of  wealth.  These  are 
nature  (some  economists  say  land),  labor,  and  capital. 
Nature  and  labor  are  original  factors,  but  capital — being 
itself  produced  by  nature  and  labor — is  a  derived  factor. 

Nature. — The  various  powers  of  nature,  such  as  the  ex- 
pansive power  of  steam,  the  force  of  gravity,  the  power  of 
electricity,  the  force  of  the  winds,  and  many  others,  are 
used  in  the  production  of  wealth.  Rivers,  lakes,  and 
oceans  furnish  means  of  transportation  and  supply  oppor- 
tunities for  securing  fish,  seals,  sponges,  and  other  material. 
Most  important  among  the  contributions  of  nature  is  land. 
The  most  obvious  contribution  of  land  is  standing  room 
to  support  people,  plants,  animals,  and  buildings.  Mere 
standing  room  is  not  enough  to  make  land  valuable,  as 
deserts  and  waste  places  furnish  that  in  abundance.  Min- 
erals, upon  or  under  the  surface,  are  a  most  important  con- 
tribution of  land.  Situation,  which  makes  land  available, 
is  always  an  important  element.  Coal  deposits  in  Penn- 
sylvania are  much  more  useful  than  in  Alaska,  because 
they  are  easily  sent  to  market,  can  be  worked  throughout 


42  THE   ELEMENTS   OF   ECONOMICS 

the  year,  and  labor  is  obtainable  in  sufficient  amount. 
Situation  sometimes  alone  would  make  land  valuable,  as 
is  the  case  in  regard  to  city  land,  where  fertility  is  of  no 
importance.  Fertility  of  the  soil  and  location  are  both 
elements  of  importance  in  agriculture. 

Land  as  Property. — In  a  primitive  society  land  is  seldom 
private  property;  it  belongs  to  the  tribe  collectively.  Men 
in  such  a  condition  of  societ}'  obtain  their  living  chiefly  by 
hunting  and  fishing  and  gathering  the  wild  fruits  and  nuts, 
but  as  animals  and  plants  become  domesticated  and  popu- 
lation increases,  much  of  the  land  becomes  private  prop- 
erty. The  waters  of  rivers,  lakes,  and  oceans  are  not 
usually  appropriated  by  individuals,  though  inland  waters 
and  waters  of  oceans  within  a  three-mile  limit,  as  well  as 
enclosed  bays,  are  regarded  as  national  waters. 

The  Influence  of  the  Land  upon  the  People. — ^A  popu- 
lation will  generally  devote  itself  to  that  kind  of  industry 
for  which  the  country  which  it  inhabits  is  suitable.  Well- 
wooded  country  will  support  a  lumbering  industry,  at 
least  until  the  trees  are  cut.  Some  lands  are  worthless 
for  agriculture  but  valuable  for  ore;  some  are  suitable  for 
vineyards  but  worthless  for  cotton.  In  case  lands  may  be 
used  for  various  purposes,  the  industry  which  produces  the 
largest  return  in  value  of  products  will  be  the  one  to  which 
the  population  sooner  or  later  will  resort. 

Increase  in  Land. — The  area  of  the  earth  cannot  be  in- 
creased, but  it  is  possible  to  increase  the  useful  area.  The 
man  who  drains  a  swamp,  clears  the  stone  from  a  field,  or 
makes  fertile  a  barren  piece  of  land  increases  the  available 
land. 

Through  the  Reclamation  Service  of  the  Department  of 


b  .H 
pi    S 

W   .SB 


£2i 


44  THE   ELEMENTS   OF   ECONOMICS 

the  Interior  much  has  been  done  to  increase  the  available 
land  in  the  United  States.  The  Imperial  Valley  of  Cali- 
fornia is  now  one  of  the  garden  spots  of  America;  before  the 
water  of  the  Colorado  River  was  brought  to  this  valley  it 
was  a  desert  waste.  Thousands  of  acres  have  been  re- 
claimed by  irrigation  in  Arizona,  New  Mexico,  and  Wyo- 
ming and  other  western  states.  Improved  methods  of 
agriculture,  such  as  ''dry  farming,"  may  also  increase 
available  lands. 

Increased  means  of  transportation  also  makes  available 
the  use  of  land  which  previously  could  not  be  worked 
economically  because  of  distance  from  a  market. 

The  Influence  of  the  Consumer  upon  Production. — Con- 
sumers, by  their  demands,  determine  to  a  large  degree 
what  shall  be  produced  and  how  it  shall  be  produced. 
Every  act  of  production  requires  the  co-operation  of  nature, 
labor,  and  capital.  It  is  desirable  that  goods  be  produced 
which  will  make  the  least  demand  upon  land,  labor,  and 
capital,  and  which  can  adequately  satisfy  wants.  This  has 
been  called  the  law  of  the  least  social  cost. 

If  the  land  of  a  community  be  well  suited  to  the  growing 
of  potatoes  and  corn  and  poorly  adapted  to  the  growing  of 
wheat,  it  is  better  that  the  inhabitants  consume  more 
potatoes  and  corn  than  wheat.  Even  though  they  ex- 
change potatoes  and  corn  for  wheat  grown  elsewhere, 
there  is  the  cost  of  transportation  and  exchange  to  be  con- 
sidered. It  is  equally  important  that  men  be  employed  at 
what  they  can  do  best. 

Not  infrequently  the  failure  of  laborers  to  do  that  which 
they  can  do  best  is  not  the  lack  of  demand,  but  ignorance 
of  opportunity  or  some  social  cause.     Thousands  of  Italian 


s'i 

c    ^c 
^  3  ^ 

o 


pq 


46  THE   ELEMENTS   OF   ECONOMICS 

immigrants,  who  were  excellent  agricultural  laborers  in 
Italy,  come  to  the  United  States  every  year  and  take  em- 
ployment in  the  cities  at  work  for  which  they  never  had 
any  training  and  at  a  time  when  good  agricultural  laborers 
were  never  more  needed. 

The  influence  of  the  consumer  upon  conditions  of  pro- 
duction is  shown  by  consumers'  leagues,  which  are  organi- 
zations of  consumers  pledged  not  to  consume  articles  pro- 
duced by  child  labor  or  where  other  conditions  of  produc- 
tion are  socially  bad.  Goods  produced  under  approved 
conditions  sometimes  bear  a  label,  testifying  to  this  fact. 
A  union  label  is  sometimes  attached  to  goods  produced  by 
organized  labor.  The  effort  of  producers  to  inform  the 
pubHc  concerning  conditions  of  production,  shows  that  the 
consumers  may  influence  the  conditions  of  production. 

Thrift  versus  Extravagance. — Thrift  is  care  and  pru- 
dence in  the  management  of  one's  resources.  At  no  time 
in  our  history  has  thrift  been  more  necessary  than  in  these 
years  following  the  Great  War.  War  causes  the  destruc- 
tion of  many  economic  goods,  piles  up  national  debts,  and 
takes  millions  of  laborers  from  productive  employments  to 
be  supported  at  public  expense.  But  this  is  not  all;  a 
prosperity,  often  fictitious,  encourages  extravagance,  or 
possibly  the  extravagance  is  caused  by  a  desire  to  forget 
war  and  its  consequences.  This  is  not  confined  to  the 
United  States;  victorious  France  and  defeated  Germany 
alike  have  been  extravagant  spenders,  and  at  a  time  when 
increased  production  and  economy  in  consumption  were 
urgently  needed. 

As  an  example  of  the  influence  of  extravagance  upon 
prices  and  demand  for  labor  let  us  consider  for  a  moment 


THE   PRODUCTION   OF   WEALTH  47 

the  extravagant  use  of  an  automobile  for  pleasure  pur- 
poses. A  man  who  has  saved  only  $1,000  withdraws  it 
from  the  bank  and  buys  an  automobile.  His  demand  for 
gasoline  tends  to  increase  the  price  of  gasoline  for  produc- 
tive purposes;  his  car  needs  repairs  frequently  and  the 
number  of  men  withdrawn  from  other  occupations  into 
automobile  repairing  increases;  he,  like  thousands  of  his 
kind,  goes  touring,  and  garages  in  every  little  village  are 
made  to  minister  to  his  wants  and  men  are  withdrawn  from 
agriculture  and  land  withdrawn  from  cultivation  in  order 
that  he  may  be  served.  It  is  not  too  much  to  say  that 
extravagance  in  the  purchase  and  use  of  automobiles  for 
pleasure  purposes  is  a  contributing  cause  to  the  high  cost 
of  living. 

Mr.  Andrew  Carnegie  remarked  some  years  ago  that  our 
troubles  were  not  so  much  concerned  with  the  high  cost  of 
living,  but  the  cost  of  living  high,  and  if  it  were  uttered 
more  or  less  as  a  jest,  many  truths  are  so  uttered.  A  high 
standard  of  living  does  not  mean  an  extravagant  standard 
of  living.  The  road  to  economic  prosperity  is  not  being 
trod  by  those  who  think  they  must  spend  every  cent  they 
earn.     Thrift  and  saving  are  virtues  to  be  commended. 

When  production  exceeds  consumption  there  is  economic 
progress;  on  the  other  hand,  if  consumption  is  greater  than 
production  there  is  an  economic  decline.  With  production 
exceeding  consumption  capital  is  accumulated  and  new 
factories,  dwellings,  and  other  utilities  may  be  erected,  but 
if  a  community  is  consuming  more  than  it  produces,  it  is 
living  on  past  accumulations  which  will  in  time  be  ex- 
hausted. In  time  of  war  consumption  usually  exceeds 
production;   vast  numbers  of  men  are  withdrawn  from 


48  THE   ELEMENTS   OF   ECONOMICS 

ordinary  economic  activities  and  put  into  military  service 
where  they  produce  no  economic  goods,  but  consume 
immense  quantities  of  food,  clothing,  and  war  supplies. 
Another  host  of  laborers  at  home  is  withdrawn  from  peace- 
ful and  productive  activities  and  put  to  work  making  sup- 
plies for  the  army.  Though  other  influences  are  also  at 
work,  this  alone  accounts  for  the  scarcity  and  resultant 
prices  of  goods  during  war  times.  There  can  be  no  re- 
covery from  high  prices  until  production  not  only  catches 
up  with  consumption,  but  passes  it.  Of  all  the  belliger- 
ents on  the  continent  of  Europe  in  the  recent  war,  Belgium 
was  the  first  to  settle  down  to  work  after  the  war  was  over, 
and  it  bids  fair  to  reach  soon  its  pre-war  production.  It  is 
work  and  thrift  which  win  in  war  or  in  peace.  A  man  who 
produces  less  than  he  consumes  is  an  economic  liability  and 
not  an  asset. 

Summary. — The  production  of  wealth  is  the  creation  of 
form,  place,  time,  and  possession  utilities.  Those  who 
render  personal  services  also  create  utilities  and  are  pro- 
ducers of  wealth.  Every  producer  of  wealth  is  an  aid  to 
the  economic  life  of  a  community.  Every  person  who  is 
able  but  unwilling  to  work  is  a  detriment  to  any  com- 
munity. Land,  labor,  and  capital  co-operate  in  the  pro- 
duction of  wealth.  Each  is  dependent  upon  the  other. 
Labor  and  land  can  do  little  without  capital,  nor  can  any 
combination  of  two  factors  do  much  without  the  third. 
Although  the  area  of  the  earth's  surface  cannot  be  in- 
creased, it  is  possible  to  increase  the  useful  area.  Capital 
is  increased  by  savings.  The  greater  the  supply  of  land 
and  capital,  the  more  is  the  demand  for  labor.  War  de- 
stroys capital  and  labor.     Hence  it  diminishes  production 


THE   PRODUCTION   OF   WEALTH  49 

of  wealth.  Even  land  may  be  injured  by  war.  Parts  of 
Belgium,  once  rich  agricultural  lands,  were  flooded  for 
years  with  salt  water  and  cannot  become  productive  for 
generations.  Much  of  the  land  of  northern  France  has 
been  injured  by  being  impregnated  with  gases  and  the 
top  soil  blown  away  by  explosions.  Work  and  saving 
enable  a  country  to  recover  from  war  conditions. 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1.  Are  teachers  producers  of  wealth?     Are  editors?     Are  gam- 

blers?    Why? 

2.  Give  a  list  of  non-producers  of  wealth.     Show  what  non-pro- 

ducers are  detrimental  to  a  community. 

3.  The  city  of  Chicago  has  filled  in  the  lowlands  which  formerly 

formed  the  border  of  Lake  Michigan  and  has  reclaimed 
much  land  that  was  once  covered  with  water.  The  Chicago 
lake  front,  once  an  ugly  spot,  has  become  a  park.  What 
land  in  your  community  has  become  available  in  recent 
years?  What  lands  now  idle  in  the  vicinity  of  your  city 
may  be  made  useful? 

4.  Show  how  railroads  increase  the  available  lands  of  a  country. 

What  economic  services  are  rendered  by  wagon-roads? 
Show  how  poor  roads  increase  the  cost  of  agricultural  com- 
modities. Are  the  country  roads  near  your  city  in  good 
condition?     How  might  they  be  improved? 

5.  Show  how  the  Reclamation  Service  of  the  Department  of  the 

Interior  has  made  land  available  for  use  in  Arizona,  Wyo- 
ming, and  New  Mexico.  Write  to  Department  of  Interior, 
Washington,  D.  C,  for  information  on  reclamation. 


CHAPTER  VI 
LABOR  AND  POPULATION 

The  second  factor  in  the  production  of  wealth  is  labor. 
To  the  economist  all  effort  directed  toward  the  production 
of  wealth  is  labor,  whether  this  effort  be  of  mind  or  body. 
The  effectiveness  of  labor  is  influenced  by  many  quali- 
ties, the  most  obvious  of  which  is  strength.  Other  things 
being  equal,  a  strong  man  can  work  better  than  a  weak 
one.  Physical  strength  alone  is  of  little  value;  many  of 
the  lower  animals  far  surpass  man  in  that.  Moral  quali- 
ties, such  as  temperance,  truthfulness,  and  reliabiUty  are 
needed.  Mental  traits  such  as  skill,  quickness,  and  me- 
chanical ingenuity  are  also  necessary. 

Labor  is  much  more  efficient  under  good  physical  sur- 
roundings. It  pays  to  have  factories  well  lighted  and 
ventilated  and  properly  equipped  in  other  respects.  Social 
esteem  adds  to  the  productiveness  of  labor.  Wherever 
labor  is  held  in  low  esteem  it  produces  little.  If  labor  is 
highly  esteemed  men  do  not  seek  to  avoid  it  and  they 
have  pride  in  their  calling. 

Temporary  Lowering  of  Efficiency  of  Labor. — In  the 
United  States  the  efficiency  of  labor  was  undoubtedly 
lowered  during  the  war  and  immediately  after  its  close. 
In  1914  a  capable  bricklayer  would  lay  1,900  bricks  per 
day  for  a  wage  of  $5.  Bricklayers  in  1920  did  not  average 
more  than  half  the  efficiency  of  1914,  though,  wages  in 

^  so 


LABOR   AND    POPULATION  51 

1920  were  $9  per  day.  This  loss  in  efficiency  was  partly 
caused  by  the  necessity  during  the  war  of  getting  labor 
of  any  degree  of  ability.  During  the  war  any  man  who 
could  work  at  all  could  get  a  job,  and  high  wages  at- 
tracted all  kinds  of  men.  Professor  David  Friday,  in  a 
valuable  contribution  to  economic  science,  remarks :  * 

''There  seems  to  be  a  general  opinion  among  employers 
and  managers  that  the  efficiency  of  labor  to-day  is  as  low 
as  60  per  cent  of  its  19 14  level.  Now  an  average  payment 
of  210  per  centf  for  an  efficiency  of  60  per  cent  means  a 
unit  cost  for  labor  of  350  per  cent,  as  against  100  in  19 14. 
If  the  efficiency  of  labor  is  as  high  as  70  per  cent,  then  the 
labor  cost  per  unit  of  output  is  3CX)  per  cent  of  what  it  was 
then.  That  such  an  increase  in  cost  per  unit  of  output 
must  exercise  a  powerful  effect  upon  price  is  apparent. 
Not  only  is  the  cost  of  the  labor  element  in  production 
increased,  but  the  overhead  costs  are  also  greater  as  the 
time  consumed  in  production  is  longer. 

''This  fall  in  output  per  laborer  has  proceeded  at  an 
unusual  rate  since  the  summer  of  19 19.  Coupled  with 
the  increase  in  money  wages  there  seems  little  doubt  that 
there  has  been  since  the  armistice  a  general  increase  in  the 
labor  cost  per  unit  of  at  least  one-third  and  possibly  one- 
half." 

In  the  late  autumn  of  1920  and  the  winter  of  192 1  there 
was  a  gradual  increase  in  the  efficiency  of  labor.  Indus- 
trial plants  discharged  less  efficient  laborers  and  so  raised 
the  general  average  of  efficiency.  Though  a  war  may 
render  labor  less  efficient  for  a  time,  as  soon  as  normal  con- 

*  Profits,  Wages  and  Prices,  p.  109. 

t  The  average  increase  in  wages  since  19 14. 


52  THE   ELEMENTS   OF   ECONOMICS 

ditions  are  restored  efficiency  begins  to  return  to  old 
standards. 

Division  of  Occupation  and  Division  of  Labor. — No  man 
can  do  all  things  equally  well;  a  jack-of-all- trades  has  ever 
been  a  master  of  none.  Since  this  is  true  it  is  much  better 
for  a  man  to  confine  his  attention  to  those  things  which  he 
can  do  well  and  exchange  his  labor  or  the  goods  which  he 
produces  for  the  other  articles  which  he  needs.  This  is 
division  of  occupation.  The  advantages  of  division  of 
occupation  were  understood  very  early  in  the  history  of 
mankind.  Among  savage  tribes  the  arrow-heads  were 
made  by  men  who  were  skilful  workers  in  stone,  the  shafts 
were  made  by  other  men,  and  the  bows  by  yet  another  set 
of  men.  As  civilization  increased  the  division  of  occupa- 
tion increased,  and  in  modern  times  there  is  a  greater 
specialization,  which  we  call  division  of  labor.  Few  men 
make  an  entire  article.  For  example,  fifty  years  ago  there 
were  still  men  who  made  an  entire  shoe,  but  now  there  are 
a  score  of  operations  in  the  making  6f  a  shoe  and  each 
worker  is  confined  to  one  of  these  operations^  One  man 
cuts  out  the  upper,  another  cuts  the  sole,  another  sews 
the  upper,  another  runs  a  machine  that  makes  eyelets, 
another  puts  on  the  heel.  Thus  the  shoe  is  made  by  a 
number  of  men,  no  one  of  whom  could  make  an  entire 
shoe.  This  division  of  labor  holds  in  all  employments.  A 
striking  example  of  the  minute  division  of  labor  in  the 
great  packing-houses  is  given  by  Professor  Commons: 

''It  would  be  difficult  to  find  another  industry  where 
division  of  labor  has  been  so  ingeniously  and  microscopi- 
cally worked  out.  The  animal  has  been  surveyed  and  laid 
off  like  a  map;  and  the  men  have  been  classified  in  over 


54  THE   ELEMENTS   OF  ECONOMICS 

thirty  specialties  and  twenty  rates  of  pay  from  i6  cents  to 
50  cents  an  hour.  The  50-cent  man  is  restricted  to  using 
the  knife  on  the  most  delicate  parts  of  the  hide  (fioorman) 
or  to  using  the  axe  in  spHtting  the  back-bone  (splitter); 
and  wherever  a  less  skilled  man  can  be  slipped  in  at  18 
cents,  i8>^  cents,  20  cents,  22>^  cents,  24  cents,  and  so  on, 
a  place  is  made  for  him  and  an  occupation  mapped  out. 
In  working  on  the  hide  alone  there  are  nine  positions  at 
eight  different  rates  of  pay.  A  20-cent  man  pulls  off  the 
tail,  a  22/^-cent  man  pounds  off  another  part  where  the 
hide  separates  readily,  and  the  knife  of  the  40-cent  man 
cuts  a  different  texture  and  has  a  different  'feel'  from  that 
of  the  50-cent  man.  Skill  has  become  specialized  to  fit  the 
anatomy. '^ 

Division  of  labor  is  not  confined  to  manufacturing  and 
commerce.  It  has  entered  the  professions.  Not  long  ago 
the  high-school  teacher  was  supposed  to  be  able  to  teach 
Latin,  French,  and  mathematics  as  chief  subjects  and  de- 
vote any  spare  time  to  history  and  English.  Now  every 
good  high  school  has  teachers  who  are  specialflts.  In 
medicine,  dentistry,  and  law  a  similar  development  of 
specialists  has  occurred. 

Advantages  of  the  Division  of  Labor. — Division  of  labor 
has  several  advantages.  In  the  first  place  practice  in 
doing  one  thing  produces  great  skill.  To  one  watching  a 
girl  packing  candy  in  a  large  candy  factory,  the  skill  and 
rapidity  of  motion  which  she  shows  seems  wonderful,  but 
there  is  nothing  remarkable  about  it.  It  is  the  result  of 
long  practice.  Then  there  is  much  time  saved  that  would 
be  lost  in  passing  from  one  sort  of  work  to  another.  Also- 
machinery  is  fully  utilized,  and  invention  stimulated,  be- 


LABOR   AND   POPULATION  55 

cause,  as  Adam  Smith  said:  "Men  are  much  more  likely  to 
discover  easier  and  readier  methods  of  obtaining  any  object, 
when  the  whole  attention  of  their  minds  is  directed  to  that 
single  object,  than  when  it  is  dissipated  among  a  great 
variety  of  things."  Many  inventions  have  been  made  by 
common  laborers,  who  have  found  new  methods  of  doing 
some  part  of  .their  work.  Through  the  division  of  labor 
many  more  things  can  be  produced  by  the  same  number  of 
men  and  the  cost  of  making  goods  is  therefore  reduced. 

Disadvantages. — It  is  often  maintained  that  division  of 
labor  takes  away  the  pride  which  a  working  man  might 
have  in  his  product.  A  man  might  enjoy  making  a  pair 
of  shoes,  but  what  intellectual  stimulus  can  come  from 
running  a  machine  which  stamps  eyelets?  The  deadly 
monotony  of  a  single  operation  repeated  all  day  long  is 
also  urged  as  a  disadvantage.  However,  division  of  labor 
has  come  to  stay  and  to  grow  in  importance.  With  an 
eight-hour  working-day  and  increased  time  and  oppor- 
tunity for  education  and  recreation,  the  alleged  disad- 
vantages seem  trivial  as  compared  to  the  advantages. 

The  Geographical  Division  of  Occupation. — ^A  geograph- 
ical division  of  occupation  in  the  United  States  is  notice- 
able. The  growing  of  spring  wheat  is  the  leading  industry 
of  Minnesota  and  the  Dakotas;  corn  is  the  great  crop  of 
Illinois,  Kansas,  and  the  other  states  of  the  "corn  belt"; 
cotton  is  produced  in  the  Gulf  States;  small  fruits  are  grown 
in  central  New  York,  New  Jersey,  Delaware,  and  Cali- 
fornia; and  tobacco  is  grown  in  Virginia,  Kentucky,  and 
the  Carolinas. 

Collars  and  cuffs  are  made  more  largely  in  Troy  than 
elsewhere;  more  than  half  the  gloves  manufactured  in  this 


56  THE   ELEMENTS   OF   ECONOMICS 

country  are  produced  in  the  adjoining  cities  of  Glovers- 
ville  and  Johnstown,  New  York;  Paterson,  New  Jersey, 
specializes  in  silk;  East  Liverpool,  Ohio,  and  Trenton,  New 
Jersey,  are  noted  for  their  potteries;  Brockton,  Massa- 
chusetts, is  a  centre  of  boot  and  shoe  manufacturing;  and 
Fall  River,  Massachusetts,  is  chiefly  concerned  in  making 
cotton  goods. 

Causes  for  Geographical  Division  of  Occupations. — The 
thirteenth  census  of  the  United  States  gives  several  reasons 
for  the  localization  of  industry: 

1.  Nearness  to  raw  materials.  Other  things  being  equal, 
nearness  to  raw  materials  aids  industry.  The  flour-mills 
in  MinneapoHs,  tobacco  factories  in  Richmond,  packing- 
houses in  Kansas  City,  and  many  other  local  industries  are 
thus  explained. 

2.  Nearness  to  markets. 

3.  Water  -  power  and  coal.  Water  -  power  originally 
helped  New  England.  More  recently  it  has  created  the 
manufacturing  industries  of  Niagara  Falls.  Though  now 
of  less  importance  than  proximity  to  a  supply  of  fuel, 
water-power,  on  account  of  new  methods  of  generating 
power  and  converting  it  into  electricity  promises  to  regain 
its  former  importance. 

4.  A  favorable  climate.  For  example,  the  moist  cli- 
mate of  Fall  River  is  favorable  to  the  cotton-manufactur- 
ing industry. 

5.  A  supply  of  suitable  labor. 

6.  Local  capital  available  for  investment. 

7.  The  advantage  of  an  early  start. 

Increase  in  Population. — The  character  and  number  of 
the  people  are  of  the  utmost  importance  to  a  country  in 


LABOR  AND   POPULATION  57 

its  economic  life.  It  is  possible  for  a  country  to  have  more 
people  than  can  be  supported  decently  by  the  resources  of 
that  country.  When  this  is  the  case  the  surplus  popula- 
tion must  either  be  decreased  by  emigration  or  suffering 
will  result.  On  the  other  hand  a  country  may  not  have 
enough  people  to  utilize  its  resources.  The  United  States 
has  been  a  country  which  could  utilize  not  only  its  own 
people  but  could  offer  employment  to  large  numbers  of 
immigrants.  The  population  of  the  United  States  has 
therefore  been  increased  by  two  methods:  (i)  The  excess 
of  births  over  deaths,  (2)  by  immigration. 

Natural  Growth  of  Population. — Where  the  birth-rate 
is  high,  the  death-rate  is  usually  correspondingly  high. 
Roumania  has  the  highest  birth-rate  in  Europe  and  also 
the  highest  death-rate.  Italy,  Hungary,  Saxony,  and  Ba- 
varia have  high  birth-rates  and  high  death-rates.  The  ec- 
onomic condition  of  a  people  does  not  seem  to  influence 
the  birth-rate,  but  the  birth-rate  affects  the  economic 
condition.  The  overpopulated  countries — and  overpopu- 
lation means  more  people  than  the  country  can  well  sup- 
port in  the  present  condition  of  arts  and  sciences — have 
a  low  standard  of  life  and  a  high  birth-rate. 

France  has  the  lowest  birth-rate  and  lowest  death-rate 
of  the  great  European  countries  and  the  standard  of  living 
is  higher  than  in  any  of  the  other  countries  of  continental 
Europe.  Roumania,  with  a  low  standard  of  living,  has  a 
birth-rate  of  40.7  per  thousand  and  a  death-rate  of  29.3  per 
thousand.  Contrast  the  birth-rate  of  22.2  per  thousand 
and  the  death-rate  of  21.5  per  thousand  in  France  with 
the  rates  in  Roumania.  The  French  people  are  thrifty 
and  prudent,  and  marriages  are  not  contracted  unless  there 


58 


THE   ELEMENTS   OF   ECONOMICS 


is  a  fair  prospect  of  being  able  to  support  a  family  in  some 
degree  of  comfort. 

The  insistence  upon  maintaining  a  high  standard  of  life 
is  the  chief  force  making  for  a  low  birth-rate. 

The  birth-rate  in  the  United  States  for  the  calendar  year 
191 7  was  24.6  per  thousand  and  the  death-rate  was  14.  i  per 
thousand.  When  the  country  was  new  and  there  were 
unlimited  possibilities  for  making  a  living  and  when  agri- 
culture was  overwhelmingly  the  chief  industry,  naturally 
the  birth-rate  was  high.  As  the  country  grew  and  city 
life  became  more  common — and  it  must  be  remembered 
country  children  become  an  economic  asset  much  sooner 
than  children  in  the  city — the  birth-rate  declined. 

The  United  States  is  so  large  and  conditions  are  so  di- 
verse in  the  different  states  that  vital  statistics  for  the 
whole  give  little  indication  of  conditions  in  any  part  of 
the  country.  States  with  a  large  colored  population,  as  a 
rule,  have  both  larger  birth  and  death  rates  than  those 
with  a  small  colored  population.     The  death-rate  has  been 


BIRTH  AND  DEATH  RATES  OF  SOME  TYPICAL  STATES 
FOR  1917 


Estimated  Population 

Birth-Rate 
F>er  Thousand 

Death-Rate 
per  Thousand 

New  York 

Wisconsin 

White, 

Colored, 

White, 

Colored, 

White, 

Colored, 

White, 

Colored, 

10,288,042 

172,140 

2,512,275 

14,862 

1,556,433 

40,967 

1,143,092 

230,581 

235 
22.6 

23-5 
13-7 
14.4 
27.2 
24.1 
27.9 

14.6 
24.8 

"5 
130 
7.4 
16.2 
15.0 
27.1 

Washington 

Maryland 

LABOR   AND   POPULATION  59 

on  the  decline  for  many  years,  the  result  of  better  sanita- 
tion and  better  treatment  of  disease. 

The  birth-rate  and  the  death-rate  depend  among  other 
things  upon  the  standard  of  living.  As  a  rule  the  negroes 
have  a  lower  standard  of  living  than  the  whites  and  they 
are  therefore  less  able  to  resist  disease.  States  like  Wash- 
ington, where  a  smaller  proportion  of  the  population  are 
infants  and  old  people,  because  the  state  attracts  many 
young  men  from  the  East,  would  naturally  have  a  lower 
death-rate  than  New  York. 

The  Malthusian  Theory  of  Population. — John  Jacques 
Rousseau  (17 12-1778),  a  brilliant  French  philosopher, 
began  his  work.  The  Social  Contract,  with  the  statement 
that  "Man  was  born  free  and  is  everywhere  in  chains." 
Man,  he  thought,  is  naturally  good,  but  has  been  degraded 
and  corrupted  by  what  is  called  civilization.  Nature  does 
everything  well.  Human  institutions  are  all  wrong.  The 
remedy  is  to  return  to  a  simple  and  virtuous  life  such  as 
existed  in  primitive  society. 

Though  Rousseau's  reasoning  was  opposed  to  all  the 
teachings  of  history  and  psychology,  it  gained  ready 
acceptance  in  many  countries. 

In  England  Thomas  R.  Mai  thus  (17  73-1 836)  attacked 
the  doctrine  of  Rousseau  in  his  famous  book,  The  Theory 
of  Population.  Malthus  claimed  that  the  greatest  cause  of 
suffering  and  misery  is  that  population  tends  to  increase 
faster  than  subsistence  and  that  without  moral  or  social 
restraints  of  any  kind,  the  population  will  reach  a  point 
where  comfortable  subsistence  is  impossible.  With  the 
maximum  birth-rate  and  the  minimum  death-rate,  Malthus 
maintained  that  the  population  would  double  in  twenty- 


6o  THE   ELEMENTS   OF  ECONOMICS 

three  years.  Nature,  he  stated,  provides  positive  checks 
upon  a  redundant  population,  and  these  are  famine,  pesti- 
lence, and  war.  That  the  population  of  India,  China, 
and  possibly  Japan  has  increased  to  such  an  extent  as  to 
make  these  positive  checks  operative  can  hardly  be  doubted, 
and  a  portion  of  the  population  in  many  other  countries  is 
in  about  the  same  condition. 

Malthus  stated  that  the  preventive  check  of  prudence 
would  prevent  the  application  of  positive  checks.  The 
state  of  civilization  of  a  country  is  indicated  by  the  kind 
of  check  placed  upon  increase  in  population.  In  countries 
like  India  and  China  positive  checks  operate;  in  countries 
more  advanced  the  population  insists  upon  maintaining  a 
high  standard  of  life,  and  in  such  countries  the  Malthusian 
law  in  its  harsher  manifestations  does  not  operate.  Many 
attempts  have  been  made  to  disprove  the  Malthusian 
theory,  but  it  stands  accepted  by  most  scientists  of  the 
present  day. 

Inimigration. — The  United  States  has  had  large  addi- 
tions by  immigration  and,  because  living  conditions  are 
better  here  than  in  most  countries,  we  have  lost  few  by 
emigration.  Immigrants  have  come  to  this  country  chiefly 
because  they  wished  to  better  their  economic  condition, 
though  from  time  to  time  political  or  religious  persecution 
has  caused  people  to  come  to  this  coimtry. 

Immigration  before  1883  was  chiefly  from  the  north  of 
Europe;  since  1883  it  has  been  chiefly  from  central  and 
southern  Europe  and  from  Russia. 

The  immigration  into  the  United  States  in  the  last  year 
before  the  Great  War  was  1,218,480;  during  the  war  immi- 
gration practically  ceased,  but  in  the  spring  and  summer 


LABOR   AND   POPULATION  6i 

ARRIVALS  OF  ALIEN  PASSENGERS  AND  IMMIGRANTS 


Country  of  Last 
Permanent 
Residence 

1871-1880 

1881-1890 

1891-1900 

1901-1910 

1911-1918 

Austria-Hungary  . 
Germany  .... 

72,969 
718,182 

55,759 

1  211,245 

52,254 

436,871 

353,719 
1,452,970 
307,309 
568,362 
265,088 

655,482 

597,047 
543,922 
655,694 
95,264 
230,679 
593,703 

403,496 

2,145,266 
341,498 

2,045,877 
190,505 
249,534 

1,597,306 

339,065 

895,937 

142,892 

1,012,495 

59,955 

86,969 

918,803 

136,116 

Italy 

Norway 

Sweden 

Russia 

The  United  King- 
dom   

of  1920  the  tide  of  immigration  began  to  rise  and  was 
apparently  only  limited  by  the  small  tonnage  available  for 
transporting  it.* 

The  immigration  before  1883  is  generally  known  as  the 
*'old  immigration."  It  came  from  the  United  Kingdom, 
Germany,  Sweden,  France,  and  the  neighboring  countries. 
The  immigration  since  1883,  known  as  the  "new  immi- 
gration," has  come  chiefly  from  Italy,  the  Balkan  coun- 
tries, and  the  lands  which  were  once  Russia  and  Austria- 
Hungary. 

*  A  new  immigration  law,  known  as  the  Dillingham  percentage  immigra- 
tion law,  went  into  effect  on  June  i,  192 1.  This  law  limits  the  number 
of  immigrants  to  be  admitted  during  the  year  1921-1922  to  3  per  cent  of 
their  countrymen  in  the  United  States,  according  to  the  census  of  1910. 
This  law  is  a  temporary  one  and  postpones  rather  than  solves  the  question 
of  immigration. 

Under  the  law  77,206  immigrants  will  be  allowed  to  enter  from  the 
United  Kingdom  during  the  fiscal  year;  from  Norway,  12,116;  Sweden, 
15,956;  Denmark,  5,644;  the  Netherlands,  3,602;  Belgium,  1,557;  Luxem- 
bourg, 92;  France,  5,692;  Switzerland,  3,745;  Germany,  68,039;  Danzig, 
285;  Finland,  3,890;  Africa,  120;  Portugal,  2,269;  Spain,  663;  Italy,  42,021; 
Russia,  34,247;  Austria,  7,444;  Hungary,  5,635;  Roumania,  7,414;  Bulgaria, 
301;  Greece,  3,286;  Czecho-Slovakia,  14,269;  Jugoslavia,  6,405;  Albania, 
287;  Fiume,  71;  Poland,  with  Western  Galicia,  25,800;  Eastern  Galicia, 
5,781;  Australia,  271,  and  New  Zealand,  50. 


62  THE   ELEMENTS   OF   ECONOMICS 

Immigration  into  the  United  States  is  prohibited  to 
those  who  have  dangerous  diseases  or  are  liable  to  become 
public  charges,  as  well  as  those  with  criminal  records  or 
who  are  tainted  with  anarchistic  doctrines  or  other  polit- 
ical heresies  which  would  make  them  undesirable  citizens. 
After  being  vetoed  by  two  previous  presidents,  a  bill  was 
signed  in  191 7  by  President  Wilson  forbidding  immigra- 
tion into  the  United  States  by  those  who  were  unable  to 
read  in  some  language. 

Sociologists  and  economists  differ  upon  what  should  be 
the  immigration  policy  of  the  United  States.  Those  who 
favor  increased  restrictions — and  some  would  even  extend 
the  restrictions  against  Chinese  and  Japanese  immigration 
to  the  rest  of  the  world — contend  that  the  new  immigra- 
tion is  not  equal  to  the  old.  The  old  immigrants  were  of 
the  same  racial  stock  as  the  bulk  of  the  American  popula- 
tion, possessed  the  same  political  ideals  and  were  readily 
assimilated,  but  the  new  immigrants  are  racially  different, 
will  not  readily  accept  American  institutions  and  will  not 
be  assimilated.  It  is  further  argued  that  America  no 
longer  needs  immigrants,  as  the  public  land  has  been  occu- 
pied and  the  immigrants  must  compete  with  Americans  for 
employment,  and  they  will  lower  the  standard  of  living  by 
accepting  a  wage  upon  which  an  American  could  not  live. 
That  the  new  immigrants  herd  in  cities  and  keep  up  their 
own  language  and  institutions  is  also  advanced  against  the 
new  immigrants. 

Those  opposed  to  further  restrictions  deny  that  the  new 
immigration  is  bad  and  claim  that  the  new  immigrants  are 
becoming  citizens  and  good  citizens;  that  their  children 
are  sent  to  American  schools  and  prefer  to  use  the  English 


LABOR   AND    POPULATION  63 

language;  that  our  high  schools  and  colleges  every  year 
show  an  increased  number  of  children  of  new  immigrants; 
that  many  have  taken  some  part  in  public  affairs;  that  the 
new  immigrants  were  second  to  none  in  the  support  they 
gave  the  United  States  during  the  Great  War.  It  is  also 
said  that  the  country  needs  a  larger  supply  of  labor  and 
the  standard  of  living  is  not  permanently  lowered  because 
the  immigrant  soon  learns  what  wage  the  American  is 
getting  and  demands  the  same  for  himself.  If  the  new 
immigrant  Hves  cheaply,  so  did  once  the  German  and  the 
Irish.  The  old  immigrant  became  assimilated  and  so  will 
the  new  immigrant. 

Americanization.* — Many  thousands  of  immigrants  have 
come  to  the  United  States  who  have  never  learned  to 
speak,  read,  or  write  the  English  language.  To  these  must 
be  added  a  large  number  of  native-born  Americans  who 
cannot  read  or  write  English  and  who  know  little  or  nothing 
concerning  American  institutions  or  self-government.  The 
total  number  of  these  classes  reaches  the  astonishing  figure 
of  eight  millions.  The  South  has  the  greater  number  of 
illiterates;  the  North  leads  in  non-EngHsh-speaking  popu- 
lation. 

Americanization  is  an  eflfort  to  assist  the  native  and 
foreign-born  illiterate  to  learn  the  Enghsh  language  and  to 
be  able  to  take  part  in  the  best  that  America  can  offer  to 
its  people.  It  has  nothing  in  common  with  the  efforts 
which  the  old  Russian  Empire  made  to  Russianize  the 
province  of  Finland  and  of  Turkey  to  suppress  the  liberties 
of  the  Armenians  or  of  the  Germans  and  Austrians,  before 
the  fall  of  the  empires  of  central  Europe,  to  crush  the 

*  See  Appendix. 


64  THE   ELEMENTS   OF   ECONOMICS 

national  customs  of  their  subject  peoples.  Americaniza- 
tion seeks  to  help  the  less  fortunate  among  our  population 
so  that  they  can  take  an  intelUgent  part  in  our  life,  may 
know  our  heroes  and  make  them  their  own,  and  may  share 
in  the  economic  advantages  that  our  country  offers. 
Americanization  not  only  concerns  itself  with  the  immi- 
grant and  the  native  illiterate  but  it  helps  the  Americans  to 
understand  the  immigrant,  to  sympathize  with  him,  and 
to  know  his  value  to  the  country.  The  immigrant  must 
not  think  that  we  do  not  care  for  him.  We  must  care 
concerning  his  welfare  and  must  welcome  him  to  a  com- 
mon enjoyment  of  the  advantages  which  our  country 
offers. 

Summary. — The  efficiency  of  labor  depends  upon  physi- 
cal qualities  such  as  health,  strength,  and  intelligence. 
Moral  and  mental  qualities  are  no  less  necessary.  Divi- 
sion of  occupation  and  division  of  labor  increase  efficiency. 
The  population  of  the  United  States  has  increased  (i)  by 
the  excess  of  births  over  deaths,  (2)  by  the  excess  of  im- 
migration over  emigration.  A  country  may  be  overpop- 
ulated  or  underpopulated.  According  to  the  Malthusian 
theory  overpopulation  has  been  a  chief  cause  of  human 
suffering.  The  United  States  on  account  of  its  great  re- 
sources has  always  attracted  immigrants  from  less  fortunate 
countries.  The  ''old  immigration"  came  from  northern 
Europe;  the  "neW  immigration"  comes  from  southern  Eu- 
rope, central  Europe,  and  Russia.  It  is  necessary  that 
immigrants  be  taught  our  language  and  institutions.  The 
object  of  Americanization  is  to  help  the  immigrant  and  to 
help  America. 


LABOR  AND   POPULATION  65 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1.  What  are  the  leading  industries  of  your  city?     For  the  manu- 

facturing of  what  articles  has  your  city  exceptional  advan- 
tages?    What  are  these  advantages? 

2.  Is  labor  in  your  city  more  or  less  efficient  than  five  years  ago  ? 

Why?  Ask  the  opinion  of  some  manufacturer.  Also  ask 
some  laborer. 

3.  Visit  some  local  factory  and  study  the  division  of  labor. 

4.  Should   immigration   into   the   United   States   be  further   re- 

stricted? How  would  the  prohibition  of  aU  immigration 
affect  the  industries  of  your  city  ?  What  would  be  its  influ- 
ence upon  wages? 

5.  What  is  Americanization?    What  efforts  toward  Americaniza- 

tion are  being  made  in  your  city?  How  can  you  help 
Americanization  ? 

6.  What  have  Italian  immigrants  done  for  America  ?    What  bene- 

fits have  come  from  German  immigrants?  from  Irish? 
from  Hebrew?  from  Scandinavian?  from  English? 


CHAPTER  VII 
THE  NATURE  AND  USE  OF  CAPITAL 

When  Robinson  Crusoe  tried  to  catch  fish  with  his  hands 
he  found  the  task  difficult.  A  few  poor  and  unpalatable 
fish  were  all  that  he  could  secure.  The  thought  came  to 
him  that  by  spending  a  few  hours  in  making  a  line  from  a 
grape-vine  and  fashioning  a  hook  from  a  bone  he  would  be 
more  successful.  He  was  not  disappointed.  But  the  best 
fish  were  still  beyond  his  reach.  He  therefore  spent  several 
days  in  chopping  down  a  tree  and  from  it  making  a  dug- 
out canoe.  Then  a  net  was  made  from  some  rope  that  he 
had  salvaged.  Thus  equipped  he  ventured  out  to  sea  and 
in  a  few  hours  caught  enough  fish  to  last  for  days.  The 
Hne  and  hook,  the  boat  and  net  were  capital.  It  took 
labor  to  make  them  and  he  was  obliged  to  wait  for  his 
reward  until  the  fish  were  caught. 

Capital  is  sometimes  called  ''the  produced  means  of 
production."  It  consists  of  all  the  products  created  by 
labor  in  co-operation  with  nature,  which  are  not  used  to 
satisfy  present  wants,  but  are  used  for  the  making  of  more 
goods.  Tools,  machinery,  buildings,  wagons,  raw  mate- 
rials, railroads,  and  all  other  material  goods  used  in  the 
production  of  wealth  are  capital.  Bank-accounts,  which 
are  necessary  for  the  conducting  of  business,  are  capital,  as 
is  also  the  money  necessary  to  carry  on  a  business. 

Land  is  not  capital.  It  is  a  gift  of  nature  and  the  laws 
governing  the  earning  power  of  land  are  different  from 

66 


THE   NATURE   AND    USE   OF   CAPITAL  67 

those  governing  the  returns  to  capital.  The  knowledge 
and  skill  a  man  possesses  are  not  capital;  they  are  a  part 
of  himself.  Goods  used  to  satisfy  wants  are  not  capital. 
They  are  known  as  "consumers'  goods,"  to  distinguish 
them  from  ''producers'  goods"  or  capital. 

Capital  and  Capital  Goods. — The  business  man  does  not 
use  the  term  ''capital"  in  exactly  the  sense  in  which  it  is 
used  by  economists.  To  the  business  man  the  term  capital 
means  the  value  of  his  equipment  in  money,  plus  the  money 
used  to  carry  on  the  business  and  the  bank  accounts  which 
the  business  has  acquired.  Many  business  men  would  also 
include  "good- will,"  patents,  and  trade-marks  as  part  of 
their  capital. 

Some  economists  distinguish  between  "capital"  and 
"capital  goods";  using  the  term  "capital  goods"  to  apply 
to  machinery,  tools,  buildings,  and  other  goods  which  wear 
out  during  the  process  of  production  and  are  constantly 
being  replaced  and  repaired.  "Capital"  they  use  as  the 
value  of  these  goods  in  terms  of  money,  including  also  the 
value  of  other  aids  to  production. 

Fixed  and  Circulating  Capital. — Economists  distinguish 
between  fixed  and  circulating  capital.  Fixed  capital  is 
capable  of  being  used  many  times,  while  circulating  capital 
is  consumed  in  one  act  of  production.  It  is  fitly  called 
circulating  capital,  for  its  value  passes  into  the  article  pro- 
duced. For  example,  a  boiler  is  fixed  capital;  the  coal 
that  is  fed  into  the  boiler  is  circulating  capital.  The  dis- 
tinction is  one  of  degree  only,  as  no  capital  is  unaffected 
by  use.  Another  example  of  fixed  capital  is  the  machinery 
in  a  candy  factory.  The  sugar  used  in  making  candy  is 
circulating  capital. 


68  THE   ELEMENTS   OF   ECONOMICS 

Free  and  Specialized  Capital. — Some  of  the  material 
aids  to  production  are  capable  of  many  uses,  and  such 
capital  goods  are  free  capital.  An  ordinary  building  may 
be  used  for  several  purposes  and  such  raw  materials  as 
wood,  coal,  and  iron  can  be  used  in  making  a  great  variety 
of  goods.  Highly  specialized  machinery  or  a  building 
suitable  to  only  one  kind  of  industry  is  specialized  capital. 
For  example,  a  type-setting  machine  can  be  used  for  one 
purpose  only  and  is  specialized  capital,  but  the  dynamo 
that  furnishes  power  to  run  the  machine  is  free  capital  and 
could  be  used  in  other  industries. 

Public  and  Private  Capital. — Capital  may  be  classified 
as  to  ownership  into  public  and  private  capital.  Public 
roads,  bridges,  canals,  as  well  as  public  buildings  used  in 
the  production  of  wealth  are  examples  of  public  capital. 
Inasmuch  as  court-houses,  public  records,  jails,  and  schools 
are  all  necessary  to  the  production  of  wealth,  they  may 
well  be  included  under  public  capital. 

The  Roundabout  Process  of  Production. — The  capital- 
istic process  of  production  is  an  indirect  or  roundabout 
method.  The  direct  method  of  getting  fish  would  be  to 
catch  them  in  the  hands,  but  this  method  seldom  produces- 
large  returns.  To  make  a  line,  fashion  a  hook,  and  secure 
bait  is  an  indirect  method  of  getting  fish,  but  it  results  in 
more  fish  being  caught.  To  build  steam  trawlers,  make 
nets  and  other  apparatus  is  still  more  indirect,  but  the 
returns  are  correspondingly  larger.  Similarly  all  employ- 
ment of  capital  is  an  indirect  method  of  production. 

•Capital  Formation. — It  is  evident  that  no  capital  would 
be  formed  if  men  consumed  all  they  produced.  Capital  is 
the  result  of  saving,  and  a  person  who  saves  is  rendering  a. 


THE   NATURE   AND   USE   OF   CAPITAL  69 

social  service  by  this  thrift.  One  of  the  causes  of  the 
high  cost  of  living  during,  and  following,  the  Great  War, 
was  the  extravagant  habits  that  led  men  and  women  to 
spend  most  of  what  they  produced,  and  thus  checked 
capital  formation.  It  is  an  error  to  think  that  capital  is 
owned  only  by  the  wealthy.  Every  person  who  owns  a 
tool  is  a  capitalist.  Every  one  who  has  a  savings-bank 
account  is  a  capitalist  and  his  capital  enables  the  bank  to 
lend  money  which  is  used  in  industry. 

For  the  formation  of  new  capital  the  first  essential  is 
production,  then  there  must  be  saving.  Then  the  invest- 
ing of  savings  in  some  form  of  production  must  follow. 
Whether  this  process  is  completed  by  the  same  person 
makes  no  difference.  The  person  who  saves  and  lets 
others  invest  his  savings  is  as  truly  adding  to  the  capital 
of  the  country  as  though  he  directly  constructed  a  fac- 
tory. 

Replacement  Funds. — Inasmuch  as  capital  goods  wear 
out  by  use,  all  business  men  must  include  as  a  part  of  the 
costs  of  production,  a  replacement  fund.  If  a  machine 
wears  out  in  five  years,  there  must  be  set  aside  during 
these  five  years  not  only  enough  to  keep  the  machine  in 
repair  but  enough  to  replace  it  when  worn  out. 

All  losses  incident  to  the  conduct  of  business  must  be 
made  good  by  replacement  funds  supplied  directly  or  by 
means  of  insurance. 

War  destroys  much  capital  and  for  such  unusual  de- 
struction no  provision  of  replacement  funds  is  ordinarily 
made  or  can  be  made.  Even  in  countries  outside  the  zone 
of  conflict,  the  energies  of  the  people  are  directed  to  war 
industries  and   replacement  funds  are  largely  neglected. 


70  THE  ELEMENTS  OF  ECONOMICS 

The  railroads  of  the  United  States  came  out  of  the  war  not 
quite  a  wreck,  but  in  a  badly  demoralized  condition,  short 
of  motive  power,  rolling  stock,  and  general  equipment. 

Summary. — Capital  is  "the  produced  means  of  pro- 
duction." It  is  necessary  to  all  modern  production  of 
wealth.  Fixed  capital  may  be  used  many  times,  but  cir- 
culating capital  is  consumed  in  one  process.  Specialized 
capital  can  be  used  for  one  thing  only,  but  free  capital  is 
capable  of  several  different  uses.  Most  capital  is  owned  by 
private  persons  or  corporations.  Public  capital  consists  of 
roads,  bridges,  canals,  and  other  direct  aids  to  the  pro- 
duction of  wealth.  Since  the  maintenance  of  order  and  the 
enforcement  of  contracts  is  necessary,  court-houses  and 
halls  of  records  are  public  capital.  Hospitals,  asylums, 
public  schools,  public  libraries,  museums,  parks,  and  other 
public  property  aid  directly  and  indirectly  in  the  produc- 
tion of  wealth  and  are  public  capital. 

The  capitalistic  production  of  wealth  is  a  roundabout 
process.  The  direct  way  to  go  from  Marion.  Ohio,  to 
Terre  Haute,  Indiana,  is  to  walk.  The  building  of  a  rail- 
road or  an  automobile  is  an  indirect  method.  When 
Robinson  Crusoe  wanted  a  pair  of  shoes  he  killed  a  pair  of 
rabbits  and  wrapped  their  hides  around  his  feet.  We 
build  factories,  buy  machinery,  and  produce  shoes  in  a 
roundabout  method. 

The  formation  of  capital  depends  upon  savings.  If  we 
consume  all  we  produce  there  can  be  no  increase  in  capital. 
Every  one  who  has  a  bank-account  is  a  capitalist  and  so  is 
every  one  who  owns  a  tool  or  a  piece  of  machinery  which 
is  used  in  the  production  of  wealth.  Most  capital  is  pri- 
vate, but  public  capital  is  also  important.     The  capitalistic 


THE   NATURE   AND    USE   OF   CAPITAL  71 

method  of  production  is  a  roundabout  process.     Capital 
is  the  result  of  saving. 


TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1.  Is  capital  necessary  in  all  production  of  wealth?     If  a  boy 

kills  a  pheasant  with  a  stone  has  capital  been  employed? 
Mention  some  other  instances  of  production  of  wealth  with- 
out capital. 

2.  Name  some  specialized  capital  that  is  in  use  in  your  own  city. 

Give  some  instances  of  capital  that  has  been  diverted  from 
one  use  to  another. 

3.  Why  might  a  jail  be  considered  public  capital?     A  school- 

house?     A  court-house? 

4.  Show  the  indirect  method  of  supplying  water  in  your  city. 

5.  What  are  the  chief  methods  by  which  savings  are  encouraged  in 

your  city? 

6.  What  method  did  Robinson  Crusoe  follow  to  get  a  new  suit 

of  clothes?  Show  how  the  capitalistic  method  would  be 
introduced  as  population  and  capital  grew. 


CHAPTER  VIII 
MARKETS,  VALUE,  AND  PRICE 

Any  place  where  buyers  and  sellers  come  together  to 
transact  business  is  a  market.  In  early  times  open  spaces 
in  each  city  were  set  apart  for  markets  and  here  came 
buyers  and  sellers.  The  Forum  at  Rome  was  originally  a 
market-place  and  so  was  the  Agora  at  Athens.  Markets 
like  those  of  the  ancient  times  may  still  be  seen  in  many 
parts  of  America.  The  farmers  driVe  into  town  on  market- 
day  and  the  townsfolk  go  to  the  market-place  to  buy. 
Prices  are  fixed  by  demand  and  supply.  For  example,  the 
farmers  may  first  offer  potatoes  at  two  dollars  a  bushel,  but 
if  there  are  more  potatoes  than  can  be  sold  at  this  price, 
some  farmer,  rather  than  take  his  potatoes  home,  will  offer 
thein  at  $1.75  and  the  other  farmers  must  meet  this  price. 
On  the  other  hand,  if  purchasers  are  eager  to  buy,  the 
farmers  will  raise  the  price. 

Markets  were  once  local,  and  prices  in  one  place  might 
be  very  different  from  prices  in  a  town  thirty  miles  away. 
With  increased  means  of  transportation  markets  came  to 
serve  a  larger  area,  and  prices  in  one  place  influenced  prices 
in  a  distant  market. 

Now  most  goods  are  sold  in  stores,  but  the  same  prin- 
ciple holds  as  in  an  open-air  market.  Each  store  is  influ- 
enced by  the  prices  of  other  stores,  and  if  goods  cannot  be 

72 


MARKETS,    VALUE,   AND   PRICE  73 

sold  at  one  price  they  must  be  reduced  in  price  until  they 
can  be  sold,  or  if  a  great  demand  exists  for  goods  the  / 
prices  may  be  increased.     It  is  no  longer  necessary  that 
buyers  and  sellers  should  come  to  the  same  place.     They 
may  trade  by  letter,  telephone,  telegraph,  or  cable. 

For  some  relatively  non-perishable  articles  there  is  a 
world  market.  For  example,  the  wheat  market  is  in  nor- 
mal times  a  world  market  and  prices  are  fixed  in  Liverpool, 
which  has  become  the  great  market  for  the  European 
wheat  trade.  Some  countries  do  not  produce  enough 
wheat  for  their  own  use,  while  others  have  wheat  to  export 
after  meeting  their  own  needs.  Wheat  is  graded  accord- 
ing to  quality,  and  a  trader  may  buy  without  ever  seeing 
the  wheat.  The  following-  tables  show  the  countries  which 
produce  wheat  in  excess  of  their  own  requirements  and  the 
countries  which  produce  less  than  they  need  and  must  im- 
port. 

PRINCIPAL   WHEAT-IMPORTING    COUNTRIES 

Country  Bushels 

Great  Britain  and  Ireland i9^,(>93,3°° 

Germany 87,357,000 

Belgium 73,422,800 

Netherlands 63,355,100 

Italy 56,302,900 

France 34,169,500 

PRINCIPAL  WHEAT-EXPORTING  COUNTRIES 

Country  Bushels 

Russia 148,262,700 

Argentine  Republic 96,858,600 

•  Canada 65,064,500 

United  States * 53,024,700 

India 40,711,100 

Australia 36,670,700 


74  THE   ELEMENTS   OF   ECONOMICS 

These  figures  are  the  average  imports  and  exports  per 
year  for  six  years  immediately  preceding  the  Great  War. 

Demand  and  Supply. — Demand  for  an  article  does  not 
mean  mere  desire.  It  must  be  desire  accompanied  by 
ability  to  purchase  at  the  market  price.  Likewise,  supply 
does  not  mean  possession  of  a  commodity,  but  willingness 
to  sell  at  the  market  price.  Demand  and  supply  vary  with 
price.  For  example,  if  potatoes  are  five  dollars  a  bushel 
there  will  be  few  purchasers,  but  all  persons  who  have 
more  potatoes  than  they  need  will  be  willing  to  sell.  With 
potatoes  at  fifty  cents  a  bushel  there  will  be  more  pur- 
chasers and  fewer  sellers.  Thus  it  is  seen  that  when  prices 
are  high,  demand  tends  to  fall  and  supply  to  increasef  and 
when  prices  are  low  demand  tends  to  increase  and  supply 
to  decrease.  With  perfect  competition  there  is  only  one 
price  in  the  same  market  at  the  same  time,  because  no 
buyer  will  pay  more  than  his  neighbor  and  no  seller  will 
sell  for  less  than  others  are  getting. 

Elastic  and  Inelastic  Demand. — ^Although  the  demand 
for  all  economic  goods  increases  as  the  price  decreases,  the 
demand  for  different  goods  does  not  vary  at  the  same  rate. 
If  the  demand  for  a  good  increases  or  diminishes  rapidly 
with  the  fall  or  rise  in  price,  the  demand  is  said  to  be 
elastic.  If  a  change  in  price  does  not  very  greatly  affect 
the  demand,  it  is  then  said  to  be  an  inelastic  demand. 
The  demand  for  salt  in  the  United  States  is  inelastic.  We 
consume  about  the  same  quantity  of  salt  no  matter  what 
may  be  the  price,  though  if  the  price  were  to  rise  very 
greatly,  economy  would  be  practised  and  the  demand 
would  decrease.  Elasticity  in  demand  varies  in  regard  to 
the  same  article  in  reference  to  the  wealth  of  purchasers. 


MARKETS,   VALUE,    AND   PRICE  75 

A^  recent  rise  in  the  price  of  gasoline  caused  many  owners 
of  automobiles  to  restrict  their  use  of  gasoline,  but  it  made 
little,  if  any,  difference  in  the  demand  of  the  very  wealthy. 
The  demand  for  eggs  by  people  of  great  wealth  is  inelastic, 
but  the  demand  of  the  average  person  is  very  elastic.  At 
thirty  cents  a  dozen,  eggs  are  eaten  for  breakfast  and  are 
a  cheap  food,  but  at  one  dollar  a  dozen  they  are  little  used 
except  by  the  rich. 

The  Law  of  Substitution. — There  are  few  articles  for 
which  there  is  no  substitute.  When  the  price  of  any 
article  rises,  substitutes  are  used  by  many  people.  When 
butter  is  forty  cents  a  pound  and  oleomargarine  is  thirty 
cents,  the  demand  for  butter  is  very  great  and  the  demand 
for  oleomargarine  correspondingly  small,  but  let  the  price 
of  butter  rise  to  eighty  cents  and  the  deman.d  is  much  less 
for  it,  while  the  demand  for  oleomargarine  becomes  much 
more  intense.  The  falling  off  in  the  demand  for  butter 
tends  to  decrease  its  price,  while  the  rise  in  the  demand 
for  oleomargarine  tends  to  increase  its  price.  In  the  same 
way  a  rise  in  the  price  of  potatoes  causes  an  increase  in 
the  demand  for  rice  and  macaroni,  or  a  rise  in  the  price  of 
wheat  causes  an  increased  use  of  corn  and  rye.  The  use 
of  substitutes  tends  to  stabilize  prices  by  decreasing  the 
demand  for  the  article  and  increasing  the  demand  for  its 
substitute. 

Subjective  Value. — There  are  two  senses  in  which  the 
term  value  is  used:  Value  in  use  and  value  in  exchange. 
Value  in  use  refers  to  the  satisfaction  that  may  be  obtained 
from  an  article  by  the  individual  who  uses  it,  while  value 
in  exchange  refers  to  what  the  article  will  bring  if  offered 
for  sale.     Value  in  use  is  called  subjective  value ;  value  in 


76  THE   ELEMENTS   OF   ECONOMICS 

exchange  is  objective  value  or  market  value.  The  subjec- 
tive value  of  an  article  may  differ  with  different  persons 
and  with  the  same  person  at  different  times.  A  first 
edition  of  Adam  Smith's  Wealth  of  Nations  would  be 
highly  esteemed  by  an  economist,  but  to  an  illiterate  man 
it  would  be  only  an  old  book  which  he  might  be  glad  to 
exchange  for  a  bag  of  tobacco.*  A  watch,  the  market  value 
of  which  is  $ioo,  might  be  a  priceless  possession  to  the  owner 
because  of  association.  Even  an  article  which  at  one  time 
may  have  little  subjective  value,  at  another  time  may  be 
of  great  subjective  value.  A  glass  of  water  which  is  or- 
dinarily a  free  good,  might  on  a  wrecked  ship  have  a  very 
high  subjective  value. 

Price  is  value  expressed  in  terms  of  money.  When  an 
article  is  displayed  in  a  store  and  is  priced  at  $ioo,  a  cus- 
tomer may  say,  *'It  is  not  worth  that  to  me,"  which  means 
that  its  value  in  use  to  him  is  less  than  that  of  other  things 
which  the  $ioo  would  purchase. 

Subjective  value  appears  to  be  far  removed  from  market 
value,  but  it  really  is  a  determining  factor  in  fixing  market 
value,  as  will  be  seen. 

Market  Value  when  there  Are  Many  Purchasers  and 
One  Seller. — Let  us  imagine  a  case  in  which  a  man  has  an 
automobile  for  sale  and  there  are  many  persons  who  wish 
to  buy  an  automobile,  their  subjective  values  differing  in 
each  case.  The  seller  would  take  $ioo  rather  than  not 
make  a  sale,  but  he  does  not  let  that  fact  be  known,  natu- 
rally wishing  to  secure  as  large  a  orice  as  possible. 

*A  daily  newspaper  expressed  unconsciously  the  distinction  when  it 
remarked:  "The  hide  of  a  rabbit  is  not  worth  two  cents  on  the  market 
but  it  is  worth  more  than  a  million  dollars  to  the  rabbit." 


MARKETS,   VALUE,   AND   PRICE  77 

Seller's  Buyers' 

Subjective  Value  Subjective  Values 

$100  $5cx> 

450 
400 
350 
300 
250 

Here  we  have  six  persons  wishing  to  purchase,  their  sub- 
jective valuations  in  each  case  differing  and  each  desiring 
to  purchase  for  as  Uttle  as  possible,  but  none  being  willing 
to  pay  more  than  the  sum  indicated.  In  an  open  market 
it  is  quite  apparent  that  the  man  who  would  pay  only  $250 
would  not  get  the  machine,  because  five  persons  would  bid 
over  his  valuation.  The  automobile  will  sell  at  a  price  at 
which  the  number  of  buyers  and  sellers  will  be  the  same 
and  this  will  be  somewhere  between  $500  and  $450,  de- 
pending upon  the  bargaining  ability  of  the  seller  and  the 
most  capable  buyer,  or  the  man  who  would  pay  $500  rather 
than  not  get  the  automobile. 

Market  Value  when  there  Are  Many  Sellers  and  One 
Buyer. — ^Let  us  take  the  reverse  of  the  example  given 
above  and  consider  market  price  when  many  sellers  are 
present  and  only  one  buyer.  Suppose  the  buyer  will  pay 
$400  rather  than  not  secure  the  automobile  and  the  sellers 
will  part  with  their  machines  at  prices  varying  from  $250 
to  $500. 

Buyer'l  Sellers' 

Subjective  Valuation  Subjective  Valuations 

$400  $250 

300 
350 
400 
450 
500 


78  THE   ELEMENTS   OF   ECONOMICS 

Supposing  competition  is  perfect,  the  price  will  not  be 
below  $250  and  will  be  less  than  $300,  since  below  $250  no 
sale  will  take  place  and  at  $300  there  will  be  one  buyer  and 
two  sellers. 

Market  Value  when  there  Are  Many  Buyers  and 
Many  Sellers. — In  actual  market  conditions  there  are  usu- 
ally many  buyers  and  many  sellers.  Let  us  suppose  there 
are  many  persons  wishing  to  sell  automobiles  of  the  same 
kind  and  in  the  same  condition  and  many  persons  wishing 
to  purchase.  This  is  always  the  case  in  the  market  for 
used  cars.  One  man  may  be  willing  to  sell  his  car  at  $800, 
but  has  no  urgent  demand  for  money  and  will  keep  it 
rather  than  accept  a  smaller  sum;  another  has  purchased 
a  larger  car  and  though  he  still  has  use  for  his  old  car  will 
sell  for  I500,  and  another  has  lost  his  interest  in  automobiles 
because  of  an  accident  and  will  gladly  sell  for  $100,  though 
he,  and  all  the  others,  wants  to  get  as  much  as  he  can  for 
his  automobile.  Other  sellers  have  other  subjective  valua- 
tions. On  the  other  hand,  buyers  have  different  intensity 
of  desire,  though  desire  alone  is  no  factor  in  the  market. 
It  must  be  desire  plus  ability  to  purchase. 

Sellers  Buyers 

$100  $8cx> 

ISO  750 

200  700 

250  650 
3cx>                                                                            •         600 

350  550 

400  500 

450  450 

500  400 

550  3SO 

600  300 

650  250 


MARKETS,   VALUE,   AND   PRICE  79 

Sellers  Buyers 

$700  $200 

750  150 

800  100 

It  is  clear  that  the  price  will  not  be  $100,  for  at  this 
figure  there  would  be  one  seller  and  fifteen  buyers,  who, 
in  a  perfect  market,  will  compete  to  raise  the  price.  At 
$150,  there  would  be  two  sellers  and  fourteen  buyers,  and 
by  following  out  this  plan  of  exclusion,  at  length  we  would 
find  that  at  $450  there  will  be  eight  buyers  and  eight 
sellers,  and  this  will  be  the  market  price  under  the  condi- 
tions assumed. 

Competition  Not  Always  Perfect. — In  the  stock  exchange 
competition  is  perfect  and  there  is  always  the  same  price 
for  the  same  stock  at  any  one  time.  Competition  is  per- 
fect at  an  auction  sale.  Sometimes  there  are  different 
prices  for  the  same  goods  in  the  same  city  because  of  lack 
of  knowledge  of  prices  which  others  are  charging.  Social 
considerations  also  cause  prices  to  be  higher  in  one  place 
than  another.  Prices  may  be  higher  for  the  same  article 
on  Fifth  Avenue,  Manhattan,  than  on  Fifth  Avenue, 
Brooklyn,  or  on  State  Street,  Chicago,  than  on  Clark 
Street  in  the  same  city. 

Market  Value  of  Complementary  Goods. — Complemen- 
tary goods  are  those  which  are  used  in  connection  with 
one  another.  Shoes  are  complementary  goods;  to  the 
vast  majority  of  persons  one  shoe  has  no  value  unless 
accompanied  by  its  mate.  But  some  complementary  goods 
have  value  as  separate  articles  and  a  different  value  when 
taken  together.  Thus  a  span  of  well-matched  horses  has 
more  than  twice  the  value  of  either  horse  considered  sepa- 
rately, and  a  string  of  perfectly  matched  pearls  has  more 


8o  THE   ELEMENTS   OF   ECONOMICS 

value  than  the  value  of  a  single  pearl  multiplied  by  the 
number  of  pearls.  The  value  of  complementary  goods 
usually  is  considered  with  the  whole  as  a  unit  and  not  one 
of  its  parts. 

The  Market  Value  of  Future  Goods. — Many  goods  are 
not  in  a  condition  to  satisfy  present  wants.  Iron  ore  can 
satisfy  no  present  want,  but  it  has  a  market  value  because 
it  can  be  made  to  satisfy  a  future  want.  The  market 
value  of  a  future  good  depends  upon  its  demaind  and  sup- 
ply, and  the  time  which  must  lapse  before  it  can  be  put  in 
shape  to  supply  a  want  and  the  expense  involved. 

The  Relation  of  Cost  of  Production  to  Value. — The 
older  economists  thought  that  cost  of  production  mea- 
sured value.  By  cost  of  production  they  meant  cost  of  the 
raw  material,  cost  of  labor,  insurance,  taxes,  interest  on 
investments,  a  reasonable  profit,  and  other  necessary  ex- 
penses to  put  the  goods  upon  the  market.  It  is  clear  that 
cost  of  production  often  fails  to  explain  value,  as  does  cost 
of  reproduction. 

A  painting  by  an  old  master  may  have  a  market  value 
of  $500,000  and  this  has  no  relation  to  the  original  cost  of 
the  canvas,  the  pigments,  or  the  price  which  the  painting 
commanded  when  first  sold.  A  crate  of  strawberries  may 
be  sold  on  a  Saturday  night  in  June  for  much  less  than  the 
cost  of  producing  them.  Other  illustrations  might  be 
given  ad  infinitum. 

There  is,  however,  a  relation  between  cost  of  production 
(often  called  normal  value)  and  market  value.  In  all  ex- 
cept monopoly  goods  *  the  tendency  is  for  market  value  to 
coincide  with  the  cost  of  production  of  the  marginal  plant. 

*  Monopoly  prices  are  considered  in  the  chapter  devoted  to  monopohes. 


MARKETS,   VALUE,   AND   PRICE  8i 

In  goods  freely  produced  (that  is,  with  no  monopoly 
features)  if  prices  are  above  the  cost  of  production,  which 
includes  a  reasonable  profit,  other  producers  will  be  at- 
tracted into  the  business,  and,  on  account  of  the  increased 
supply,  prices  will  fall.  Should  the  price  be  below  the 
cost  of  production,  the  least  capable  producer,  or  marginal 
producer,  will  in  time  be  forced  out  of  business,  and,  be-^ 
cause  of  the  resultant  decrease  of  supply,  prices  will  rise. 

The  Marginal  Producer. — In  the  previous  paragraph, 
the  term  ''marginal  producer"  was  used  and  this  requires 
some  additional  explanation.  Probably  no  two  producers 
of  goods  ever  had  exactly  the  same  cost  of  production  at 
the  same  time.  Among  the  factors  that  vary  are  efficiency 
of  labor,  proximity  to  raw  material,  nearness  to  market, 
managerial  ability,  economy  in  the  use  of  coal  or  water 
power,  purchasing  ability,  selling  agencies,  insurance,  rent, 
and  taxes. 

Let  us  take,  for  example,  the  production  of  crude-oil  of 
the  highest  grade,  known  as  Pennsylvania  Crude.  The 
wells  producing  this  oil  may  be  a  few  hundred  feet  deep  or 
may  be  a  few  thousand  feet  deep,  the  deeper  they  are  the 
more  the  cost  of  drilling  and  up-keep,  but  the  productivity 
does  not  vary  directly  or  indirectly  with  the  depth.  Some 
are  near  to  railroads  and  the  cost  of  hauling  materials  is 
comparatively  low,  others  are  many  miles  from  the  nearest 
railroad  and  wagon-roads  are  few  and  poor. 

These  are  but  two  of  the  more  obvious  differences  in  the 
cost  of  putting  down  an  oil-well.  The  well  that  produces 
the  most  oil  may  have  cost  the  less,  or  the  reverse  may  be 
true,  or  a  very  expensive  well  may  produce  no  oil.  In  the 
long  run,  however,  drilling  will  not  continue  in  territory 


82  THE  ELEMENTS  OF  ECONOMICS 

which  does  not  promise  to  pay  at  least  the  cost  of  pro- 
duction. 

Forty  years  ago  one  dollar  a  barrel  was  considered  a  fair 
price  for  crude-oil;  a  well  producing  only  a  barrel  or  so  a 
day  hardly  paid  the  cost  of  operating,  and  many  small 
wells  disadvantageously  situated  were  abandoned.  As  the 
price  of  crude  oil  rose,  not  only  were  new  wells  drilled  but 
old  ones  were  again  operated  after  having  been  abandoned. 
At  any  one  time  the  marginal  well  would  be  the  one  that 
it  just  paid  to  operate  at  the  then  current  price  of  crude 
oil. 

The  following  table  will  more  clearly  show  the  marginal 
well  at  different  times: 

Well  No.  I  can  produce  oil  at  a  profit  at  $i  a  barrel. 


Well  No.  2    " 

a         u 

(< 

"       2 

Well  No.  3    " 

11         i( 

<( 

"     3 

Well  No.  4    " 

U             li 

<( 

"     4 

Well  No.  5    " 

11         (< 

ti 

"     5 

Well  No.  6    " 

((         (( 

ii 

"    6 

Well  No.  7    " 

"         " 

(< 

»"     7 

When  oil  is  five  dollars  a  barrel,  well  No.  5  is  the  marginal 
well.  Well  No.  6  will  not  be  operated.  If  demand  should 
increase  and  the  price  rise  to  six  dollars  a  barrel,  well  No. 
6  will  then  become  the  marginal  well,  or  if  price  of  oil 
should  fall  to  four  dollars,  well  No.  4  becomes  the  marginal 
well. 

The  Example  of  Oil  Wells  a  Complicated  One. — Many 
plants  may  be  used  for  several  purposes.  A  building  con- 
structed for  a  blacksmith  shop  may  be  turned  into  a 
garage,  or  a  storage-house  or  any  number  of  other  things. 
An  oil-well  produces  oil  or  gas,  or  both,  but  nothing  else. 
It  may  cost  $5,000  to  drill  a  well,  and  the  well  may  pay 


MARKETS,   VALUE,   AND   PRICE  83 

cost  of  operating  when  completed,  but  may  not  pay  in- 
terest on  the  $5,000.  The  well  may  still  be  operated  if  it 
pays  enough  to  make  it  more  profitable  to  operate  it  than 
to  sell  or  take  to  some  other  place  the  material  that  can 
be  removed.  The  cost  of  drilling  will  then  be  charged  to 
profit  and  loss.  Whether  the  well  is  operated  or  not,  de- 
pends upon  the  ability  of  the  owners  to  sustain  the  loss 
involved.  All  specialized  plants,  that  is,  those  which  can- 
not be  used  except  for  one  purpose,  are  like  the  example 
given,  and  the  marginal  plant  may  not  pay  all  the  costs 
of  production.  Plants  below  the  margin  may  be  operated 
in  other  industries  for  a  time,  with  the  hope  of  better  re- 
sults or  a  rise  in  the  market,  but  in  the  long  run  plants 
below  the  margin  must  succumb. 

Restatement  of  the  Law  of  Value. — Market  value  is 
the  value  at  any  one  time  in  a  market  and  it  is  fixed  by 
the  interplay  of  demand  and  supply.  Normal  value  is 
determined  by  the  cost  of  production  at  the  marginal 
plant,  and,  since  most  goods  are  made  to  be  sold  and  not 
for  the  use  of  the  manufacturers,  market  value  and  normal 
value  tend  to  be  uniform,  though  there  may  be  temporary 
fluctuations  of  market  value  both  below  and  above  the 
cost  of  production.  It  should,  however,  be  borne  in  mind 
that  this  is  not  true  of  monopoly  goods,  which  are  con- 
sidered in  another  chapter. 

Summary. — ^A  market  is  a  place  where  sales  are  made. 
Markets  may  be  local  or  general.  Increased  means  of 
transportation  tends  to  make  markets  general  for  goods 
which  will  bear  transportation.  The  price  of  wheat,  corn, 
cotton,  and  tobacco  tends  to  be  fixed  by  a  world  demand 
and  supply.     A  shortage  of  the  wheat  crop  in  India  or  the 


84  THE   ELEMENTS   OF   ECONOMICS 

Argentine  Republic  influences  prices  in  Liverpool  and 
Chicago.  For  perishable  articles  the  markets  are  more 
local.  The  price  of  strawberries  in  Detroit  may  differ 
from  the  price  in  Cleveland  by  more  than  the  cost  of  trans- 
portation from  the  one  city  to  the  other,  if  the  berries  will 
not  stand  transportation  without  spoiling. 

Prices  in  a  market  are  fixed  by  demand  and  supply.  An 
elastic  demand  is  one  which  changes  rapidly  with  price; 
an  inelastic  demand  remains  about  the  same  regardless  of 
price.  For  most  articles  there  are  substitutes  and  these 
have  an  important  bearing  on  price.  Value  in  use  is  value 
to  the  person  who  may  use  the  article;  value  in  exchange  is 
what  the  article  will  bring  on  the  market.  Subjective 
value  is  another  term  for  value  in  use.  Price  is  value 
expressed  in  terms  of  money.  Market  value  depends  upon 
supply  and  demand.  Normal  value  is  measured  by  the 
cost  of  production  of  the  marginal  producer. 


TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1.  Make  a  list  of  articles  for  which  the  demand  in  your  com- 

munity is  inelastic. 

2.  To  what  extent  are  substitutes  used  in  your  community? 

3.  Give  some  examples  of  differences  in  subjective  values  of  the 

same  commodity  by  different  persons  in  your  community. 

4.  Give  some  examples  of  differences  in  price  for  the  same  article 

in  your  city. 

5.  Show  the  relation  between  market  value  and  cost  of  production 

of  wheat,  clothing,  and  furniture. 

6.  Titian's  portrait  of  Giorgio  Cornaro  was  sold  to  New  York 

dealers  in  1921  for  $300,000.     This  was  paid  because  the 
dealers  thought  it  was  worth  that  much  as  an  investment. 


MARKETS,   VALUE,   AND   PRICE  85 

What  would  be  its  subjective  value  to  a  person  who  had 
never  heard  of  Titian? 
7.  A  Chinese  art  collector  saw  a  rare  vase  in  a  Brooklyn  second- 
hand store  and  purchased  it  for  five  dollars.  The  next  day 
he  sold  it  for  $1,800.  The  subjective  value  to  the  second- 
hand dealer  was  less  than  five  dollars,  but  to  an  admirer  of 
Chinese  vases  its  subjective  value  was^  more  than  $1,800. 
As  a  matter  of  ethics,  should  the  purchaser  have  informed 
the  second-hand  dealer  concerning  the  market  value  of  the 
vase  ? 


CHAPTER  IX 
THE  ORGANIZATION   OF  INDUSTRY 

The  Entrepreneur. — Land,  labor,  and  capital  must  work 
together  for  the  production  of  wealth.  In  agriculture  in 
the  United  States  this  co-operation  is  generally  brought 
about  by  the  owner  of  the  land.  He  hires  what  labor  he 
needs,  in  addition  to  that  which  he  himself  can  supply, 
owns  the  farm  machinery  and  determines  how  the  land 
shall  be  used  and  manages  the  business.  He  is  landlord, 
capitalist,  laborer,  and  manager.  Likewise  in  small  manu- 
facturing plants  and  retail  stores,  the  organizer  of  an 
industry  not  infrequently  owns  the  land  and  capital  and 
supplies  part  of  the  labor.  In  larger  business  enterprises 
more  often  the  directing  of  business  is^  given  to  a  special 
class  of  professional  men.  These  managers  of  business 
were  once  called  undertakers,  but  since  that  term  has  now 
been  assumed  by  one  class  of  professional  men,  we  usually 
call  the  manager  of  business  by  the  French  term  entre- 
preneur. 

The  entrepreneur  organizes  and  directs  business,  whether 
himself  a  part  owner  or  not.  The  entrepreneur  is  some- 
times called  a  captain  of  industry  and  this  is  appropriate 
because  he  commands  the  industrial  forces.  The  success 
or  failure  of  a  business  depends  chiefly  upon  him. 

Individual  Proprietorship. — The  simplest  form  of  busi- 
ness organization  is  that  of  a  single  proprietor  who  is 
his  own  entrepreneur.     He  owns  or  borrows  the  capital, 

86 


THE   ORGANIZATION   OF  INDUSTRY  87 

secures  the  land,  hires  the  laborers,  and  manages  the  busi- 
ness. No  formal  documents,  no  organization  taxes  or 
other  prehminaries  are  required  by  law  in  this  type  of 
organization.  The  proprietor  is  responsible  for  all  debts 
and  to  him  belong  all  profits. 

For  example,  should  you  desire  to  engage  in  the  grocery 
business,  the  method  of  procedure  is  very  simple.  Hire  a 
suitable  store,  purchase  supplies,  and  open  your  shop  for 
business.  But  be  sure  that  you  have  ability  as  an  entre- 
preneur, because  upon  this  more  than  anything  else  de- 
pends success. 

Partnerships.— A  partnership  is  the  association  of  two  or 
Inore  persons  in  a  business  enterprise.  The  enterprise  in 
this  form  of  organization  is  owned  jointly  and  each  partner 
has  equal  rights  and  responsibilities  unless  otherwise  stated 
in  the  articles  of  partnership.  The  terms  of  partnership, 
such  as  the  sharing  of  profits  and  losses,  are  stated  in  a 
legal  document.  In  an  ordinary  partnership  each  partner 
is  Hable  for  a  debt  contracted  by  any  partner,  if  it  was 
contracted  for  the  benefit  of  the  business.  His  whole  pri- 
vate fortune  may  be  taken  to  satisfy  such  a  debt,  even  if 
it  was  incurred  without  his  knowledge. 

Another  serious  disadvantage  of  a  partnership  Is  that 
death,  or  the  bankruptcy  of  a  partner,  dissolves  the  part- 
nership. Any  dissatisfied  partner  may  also  cause  a  part- 
nership to  come  to  an  end.  So  long  as  the  partnership 
satisfies  all,  it  works  well,  but  a  little  friction  may  be  fatal. 
It  is  no  wonder  that  a  partnership  has  long  been  called  "a 
poor  sort  of  ship." 

Limited  Partnerships. — To  overcome  some  of  the  disad- 
vantages of  a  general  partnership,   limited  partnerships 


88  THE   ELEMENTS   OF   ECONOMICS 

have  been  created.  Under  a  limited  partnership  special 
partners  are  admitted;  they  have  no  voice  in  the  manage- 
ment and  are  not  liable  for  losses  in  excess  of  the  amount 
they  have  invested,  but  receive  profits  at  a  rate  agreed 
upon.  In  every  limited  partnership  there  must  be  one  or 
more  general  partners,  who  are  fully  liable  for  debts  as  in  a 
general  partnership. 

Corporations. — Intermediate  between  partnerships  and 
modern  corporations  came  the  old  joint-stock  companies. 
Like  ordinary  partnerships,  each  member  of  a  joint-stock 
company  was  liable  for  all  its  debts,  but  ownership  in  the 
joint-stock  company  was  based  upon  shares  which  could 
be  sold  without  bringing  the  company  to  dissolution.  The" 
management  of  the  company  was  intrusted  to  a  board  of 
directors  elected  by  the  stockholders. 

The  modern  corporation  is  much  like  the  old  joint-stock 
company,  but  unlimited  liability  for  debts  has  been  elim- 
inated and  the  stockholder  is  only  liable  to  the  extent  of 
his  investment.*  The  stockholders  elect  a  board  of  direc- 
tors and  this  board  chooses  the  executive  officers  of  the 
corporation.  Stock  may  be  freely  sold  and  the  corporation 
may  continue  in  business  for  an  indefinite  period.  Modern 
business  enterprises  such  as  insurance  companies,  railroad 
corporations,  ship  companies,  steel  mills,  and  others  re- 
quiring immense  capital  would  be  impossible  without  this 
form  of  organization.  The  number  of  stockholders  in  a 
great  corporation  like  the  United  States  Steel  Company 

*  In  most  states  holders  of  bank  stocks  are  liable  to  twice  the  amount 
of  their  stock;  all  the  shareholders  in  national  banks  are  so  liable.  In 
New  York,  and  a  few  other  states,  stockholders  are  liable  for  unpaid  wages 
of  defunct  corporations. 


THE   ORGANIZATION   OF   INDUSTRY  89 

reaches  hundreds  of  thousands  and  thus  the  small  investor 
as  well  as  the  large  investor  may  share  in  the  ownership  of 
a  corporation. 

Without  the  corporate  form  of  organization,  hazardous 
enterprises  such  as  the  telephone  was  once  thought  to  be, 
and  as  mining  and  drilling  for  oil  are  known  to  be,  would 
hardly  be  undertaken.  Corporations  are  known  to  the  law 
as  ''artificial"  persons;  they  may  sue  a:nd  be  sued;  may 
inherit  property;  and  may  enter  suit  for  slander. 

Corporations  are  formed  under  state  laws,  must  pay 
corporation  taxes,  and  must  file  an  annual  report  with  the 
state  authorities. 

Despite  the  very  great  advantages  which  belong  to  the 
corporation  as  a  form  of  business  organization  there  are 
some  disadvantages.  Adam  Smith,  so  long  ago  as  1776, 
observed  that  the  hired  managers  of  corporations  were  not 
so  careful  of  other  people's  money  as  though  it  were  their 
own.  This  objection  is  not  an  important  one  now.  The 
entrepreneur  knows  that  he  is  responsible  for  the  success 
of  a  business  and  his  professional  pride  and  self-interest 
cause  him  to  give  his  best  services. 

A  more  serious  objection  is  voiced  in  the  familiar  cry 
that  "corporations  have  no  souls."  Under  the  protection 
of  a  corporation  mask,  men  have  been  known  to  take  un- 
fair advantage  of  their  competitors  and  of  the  public  and 
do  many  things  which  as  individuals  they  would  shun. 
However,  with  stricter  laws  relating  to  corporations  and, 
let  us  hope,  a  more  enlightened  conscience,  these  evils  are 
less  in  evidence  now  than  they  ofice  were. 

Stocks  and  Bonds. — The  capital  necessary  to  start  a 
business  under  the  corporation  plan  is  usually  secured  by 


90  THE   ELEMENTS   OF  ECONOMICS 

selling  stocks  and  bonds.  There  are  two  kinds  of  stock; 
common  stock  and  preferred  stock.  Preferred  stock  has 
an  advantage  over  common  stock  in  that  it  has  the  first 
chance  to  secure  profits.  If,  for  example,  a  6-per-cent 
preferred  stock  be  issued,  the  common  stock  will  receive 
no  dividends  until  6  per  cent  has  been  paid  to  the  owners 
of  preferred  stock.  Preferred  stock  is  usually  non-par- 
ticipating, which  means  that  after  having  received  its 
specified  percentage,  it  shall  have  no  further  share  in  the 
profits  no  matter  how  large  they  may  be.  To  make  pre- 
ferred stock  still  more  attractive  to  the  investor,  it  is  some- 
times made  convertible,  which  makes  it  exchangeable  for 
common  stock  at  the  option  of  the  owner.  Common  stock 
is  sometimes  more  valuable  than  preferred  stock  and  the 
reverse  is  sometimes  true;  it  all  depends  upon  the  rate  of 
dividends  the  respective  stocks  command.  It  will  be  seen 
that  preferred  stock  has  the  stronger  appeal  to  the  con- 
servative investor,  while  the  man  who  is  confident  of  the 
money-making  powers  of  the  corporation  or  is  of  a  specu- 
lative nature  will  favor  the  purchase  of  common  stock. 

Oftentimes  the  organizers  of  a  business  wish  to  secure 
control  of  the  corporation  for  themselves  and  they  confine 
the  voting  power  to  one  class  of  stock,  which  is  called 
voting  stock. 

Sometimes  a  corporation,  which  is  earning  large  divi- 
dends on  its  stock,  will  issue  stock  dividends.  This  means 
that  additional  stock  is  given  to  those  who  already  own 
stock  without  any  additional  investment  on  their  part. 
Thus  if  a  corporation  has  issued  i,ooo  shares  of  stock 
which  has  been  sold  for  $ioo  a  share,  its  capital  would  be 
$100,000.     Should  it  pay  dividends  at  20  per  cent,  the 


^ 


5*- 


92  THE   ELEMENTS   OF   ECONOMICS 

return  would  seem  large,  but  a  loo-per-cent  stock- dividend 
would  increase  its  capitalization  to  $200,000  and  its  earn- 
ings would  now  appear  to  be  only  10  per  cent. 

Bonds  are  very  different  from  stocks.  Stocks  are  evi- 
dences of  ownership  in  a  corporation,  and  the  owners  of 
stocks  share  in  profits.  Bonds  are  evidences  of  a  debt 
owed  by  a  corporation.  Bonds  are  sold  in  order  to  secure 
capital,  which  has  no  share  in  management.  The  bond- 
holder nmst  receive  interest  on  his  bonds  before  anything 
goes  to  the  owners  of  stocks.  If  the  owners  of  bonds  are 
not  paid  interest  and  principal  when  due,  they  may  enter 
suit  before  a  court  of  law  to  place  the  business  in  the 
hands  of  a  receiver  or  to  protect  their  interests  in  some 
other  way. 

Profit-Sharing. — Business  enterprises,  organized  as  indi- 
vidual proprietorships,  partnerships,  or  corporations,  may 
arrange  to  admit  their  employees  to  a  share  of  the  profits. 
Profit-sharing  originated  in  France  in  the  mind  of  a  house 
painter  and  decorator  by  the  name  of  Leclaire.  The  plan 
of  sharing  profits  with  his  men  was  first  tried  in  1843  ^^^ 
met  with  success  from  the  start.  The  men  of  the  ''Maison 
Leclaire"  found  it  increased  their  earnings  and  Leclaire 
benefited  because  of  the  greater  interest  of  the  men  in 
their  work  and  their  attention  to  economy  of  time  and 
materials.  The  success  of  the  "Maison  Leclaire"  plan  led 
to  its  adoption  by  other  French  houses  and  it  soon  was 
introduced  in  the  United  States.  The  A.  S.  Cameron 
Company  of  Jersey  City  was  the  pioneer  and  the  plan  was 
successful  until  the  death  of  Mr.  Cameron. 

Profit-sharing  has  not  been  an  unqualified  success.  The 
scheme  works  fairly  well  where  the  working  men  are  intelli- 


THE   ORGANIZATION   OF   INDUSTRY  93 

gent  and  possessed  of  unusual  skill,  but  it  does  not  appeal 
to  the  unskilled  laborer,  and  when  there  are  no  profits  to 
divide  the  laborers  object.  However,  profit-sharing  has 
been  remarkably  successful  in  many  American  plants  and 
its  advocates  are  confident  of  greater  success  and  wider 
application. 

A  new  plan  of  profit-sharing  was  announced  in  August, 
1920,  by  the  International  Harvester  Company.  This 
corporation  intends  to  distribute  $60,000,000  of  its  stock 
among  its  40,000  employees  by  annual  gifts  during  a  period 
of  eight  or  ten  years.  The  gifts  of  stock  each  year  will 
vary  with  the  profits  of  the  year,  and  in  addition  cash 
bonuses  will  be  distributed.  The  corporation  expects  to 
profit  by  the  plan.  As  President  McCormick  expressed  it: 
''This  distribution  furnishes  a  distinct  incentive  to  each  and 
every  employee  to  do  his  full  share,  for  upon  individual 
effort  and  team-play  will  depend  in  a  large  measure  the 
amount  of  the  annual  extra  compensation  to  each  em- 
ployee who  is  entitled  to  participate."  In  time  the  em- 
ployees will  own  20  per  cent  of  the  stock  of  the  company 
and  will  have  a  voice  in  its  management.  The  United 
States  Steel  Company  has  sold  considerable  stock  to  its 
employees,  but  this  is  not  profit-sharing,  as  it  has  been 
sold,  though  on  very  favorable  terms,  and  not  given  as  a 
share  in  the  profits. 

Welfare  Work. — Many  corporations  do  more  for  their 
employees  than  pay  wages.  This  service  is  generally 
known  as  welfare  work.  It  is  necessarily  limited,  at  least 
in  its  full  application,  to  corporations  which  are  doing  a 
large  and  prosperous  business.  Welfare  work  includes  part 
or  all  of  the  following: 


94  THE  ELEMENTS   OF  ECONOMICS 

1.  Medical  Work. — This  includes  medical  examination, 
rest-rooms,  washing  and  bathing  facilities,  home  nursing, 
optical  and  dental  care. 

2.  Savings  and  Insurance. —  This  covers  insurance 
against  sickness,  old  age,  and  accidents. 

3.  Profit-Sharing. — Whereby  the  laborer  shares  in  the 
profits.  Usually  8  per  cent  goes  to  the  owner  before  labor 
receives  any  share  and  then  laborers  share  in  proportion  to 
wages  and  term  of  service. 

4.  Recreation.  —  Clubs,  entertainments,  dances,  and 
concerts. 

5.  Education. — ^Training  for  jobs  and  training  in  jobs. 
Training  in  citizenship,  etc. 

6.  Care  Outside  of  Working  Hours. — ^Housing  of  em- 
ployees.    Recreation  and  care  of  families. 

Co-operation  as  a  Method  of  Production. — Co-operation 
is  a  form  of  business  organization  whereby  the  working 
men  supply  the  capital  and  manage  the  industry.  It  has 
met  with  considerable  success  in  England,  Belgium,  and 
other  European  countries,  especially  in  co-operative  stores. 
In  the  United  States  co-operative  stores  have  succeeded  in 
some  places  and  have  failed  elsewhere,  depending  for 
success  or  failure  upon  the  skill  with  which  they  have 
been  managed  and  upon  local  conditions.  Co-operation  in 
manufacturing  enterprises  has  not  been  very  successful  in 
the  United  States.  Skill  in  management  is  not  possessed 
by  many,  and  the  man  who  has  such  skill  can  demand  and 
receive  a  large  remuneration.  Men  who  start  co-operative 
manufacturing  plants  are  usually  unwilling  to  pay  for  the 
best  talent  and  they  seldom  possess  it  themselves. 

Co-operative  creameries  and  cheese  factories  have  been 


THE   ORGANIZATION   OF   INDUSTRY  95 

very  successful,  but  they  are  not  co-operative  in  the  real 
meaning  of  the  term.  A  group  of  farmers  builds  the 
creamery  and  hires  a  man  to  run  it.  The  farmers  share  in 
the  earnings,  but  do  not  work  in  the  plant.  The  farmers 
are  really  capitalists,  and  that  they  take  milk  to  the  plant 
in  no  way  changes  their  status. 

Industrial  Democracy. — The  plan  of  giving  employees  a 
voice  in  factory  management  was  adopted  in  England  as 
a  reconstruction  policy  after  the  Great  War,  but  its  most 
extensive  application  has  been  in  Belgium.* 

In  the  United  States,  recently,  a  number  of  industrial 
plants  have  adopted  the  plan  and  this  includes  some  of  the 
largest  in  the  country,  such  as  the  Standard  Oil  Company 
of  New  Jersey  and  the  Goodyear  Tire  &  Rubber  Company 
of  Akron,  Ohio. 

The  method  is  not  uniform.  In  a  number  of  plants, 
joint  committees,  composed  of  equal  numbers  of  em- 
ployees, have  charge  of  all  matters  pertaining  to  employ- 
ment, working  conditions,  hours  of  labor,  safety  and 
accidents,  etc.;  profit-sharing  is  also  usually  included.  In 
other  plants  an  organization  somewhat  similar  to  that  of 
the  United  States  Government  is  followed:  There  is  a 
Cabinet  consisting  of  the  executive  officers  of  the  com- 
pany; a  Senate  composed  of  heads  of  departments  and 
foremen;  and  a  House  of  Representatives  elected  by  the 
employees. 

It  has  been  found  that  labor  representation  tends  to  give 
the  laborer  a  greater  interest  in  his  work  and  in  the  plant 
as  a  whole;  helps  him  to  overcome  the  sense  of  isolation; 

*  See  "Industrial  Councils  in  Belgium,"  by  Henry  de  Man,  The  Survey, 
July  3,  1920. 


96  THE   ELEMENTS   OF   ECONOMICS 

makes  it  possible  to  adjust  matters  of  difference  without 
resorting  to  strikes  and  lockouts;  increases  production  and 
lessens  waste  and  the  labor  turn-over. 

Mr.  Paul  W.  Litchfield,  factory  manager  of  the  Good- 
year Tire  &  Rubber  Company,  bears  testimony  as  to  its 
success  in  that  factory  and  to  the  spirit  of  co-operation 
that  has  resulted.  ''Nearly  every  decision  has  been  unani- 
mous, and  where  there  have  been  differences  of  opinion,  in 
each  case  parts  of  both  groups  were  voting  the  same  way."  * 
Not  only  has  labor  representation  worked  well  with  highly 
skilled  labor,  but  Mr.  John  Leitch,  in  his  valuable  work, 
Man  to  Man,  shows  how  it  has  been  as  great  a  success  in 
plants  where  it  might  reasonably  be  thought  there  would 
be  little  chance  of  success. 

At  the  Industrial  Conference  of  191 9,  called  by  the 
President  of  the  United  States,  it  was  found  ''That  joint 
organization  of  management  and  employees,  where  under- 
taken with  sincerity  and  good- will,  has  a  record  of  success." 
The  report  of  the  conference  further  states  "Employee 
representation  must  not  be  considered  solely  as  a  device 
for  settling  grievances.  It  can  find  success  only  if  it 
also  embodies  co-operation  in  the  problem  of  production. 
Whatever  subjects  the  representatives  come  to  feel  as 
having  a  relation  to  their  work,  and  their  effectiveness  as 
members  of  the  plant,  may  come  within  the  field  of  com- 
mittee consideration. 

"It  must  be  undertaken,  if  at  all,  in  a  thoroughgoing 
way.  Representatives  must  be  selected  by  the  employees 
with  absolute  freedom.     In  order  to  prevent  suspicion  on 

♦Litchfield,  The  Industrial  Republic,  pp.  91,  92.  See  Appendix  for  the 
Goodyear  plan. 


THE   ORGANIZATION   OF   INDUSTRY  97 

any  side,  selection  should  be  by  secret  ballot.  There  must 
be  equal  freedom  of  expression  thereafter.  All  employees 
must  feel  absolutely  convinced  that  the  management  will 
not  discriminate  against  them  in  any  way  because  of  any 
activities  in  connection  with  shop  committees.  Meetings 
should  be  held  frequently  and  regularly,  not  merely  when 
specific  disputes  are  threatened.  Both  sides  must  be  pre- 
pared to  study  the  problems  presented  and  must  give 
them  patient,  serious,  and  open-minded  consideration." 

No  plan  of  this  kind  can  succeed  unless  the  representa- 
tives of  capital  are  prepared  to  give  a  *' square  deal"  to 
labor  and  unless  labor  is  willing  to  give  a  fair  day's  work 
for  a  fair  day's  pay. 

''The  idea  of  employee  representation  has  aroused  oppo- 
sition from  two  sources:  On  the  one  hand,  in  plants  too 
large  for  direct  personal  contact,  employers  who  still  ad- 
here to  the  theory  that  labor  is  a  commodity,  hold  off  from 
any  co-operation  with  employees.  This  view  is  steadily 
disappearing  and  will,  it  is  to  be  hoped,  wholly  disappear. 
On  the  other  hand,  a  number  of  trade-union  leaders  regard 
shop  representation  as  a  subtle  weapon  directed  against 
the  union.  This  theory  is  apparently  based  on  the  fear 
that  it  may  be  used  by  some  employers  to  undermine  the 
unions.  Conceived  in  that  spirit  no  plan  can  be  a  lasting 
agency  of  industrial  peace."  * 

The  Relation  of  the  State  to  Industry. — In  many  coun- 
tries the  government  directly  engages  in  industry.  In 
most  European  countries  the  telephone-lines,  the  tele- 
graph, the  railroads,  and  many  other  forms  of  industry  are 
owned  and  operated  by  the  State.     The  United  States 

*  Report  of  the  Industrial  Conference,  p.  10. 


98  THE   ELEMENTS   OF  ECONOMICS 

conducts  the  postal  business.  Most  American  cities  sup- 
ply water  to  their  inhabitants,  while  some  own  and  operate 
electric  light  and  gas  plants. 

The  question  of  extending  or  contracting  the  sphere  of 
government  participation  in  industry  is  one  of  the  leading 
questions  of  our  time,  which  will  be  discussed  in  a  subse- 
quent chapter. 

Indirectly  the  State  is  a  partner  in  all  production  of 
wealth.  Among  the  services  which  it  renders  may  be  men- 
tioned the  following: 

1.  It  provides  courts  whereby  contracts  may  be  en- 
forced. There  could  be  no  production  of  wealth  in  the  mod- 
ern sense  without  assurance  that  agreements  will  be  kept. 

2.  It  regulates  the  holding,  transfer,  and  bequest  of 
property. 

3.  It  provides  a  system  of  currency,  a  standard  of 
weights  and  measures,  builds  and  repairs  roads,  bridges, 
lighthouses,  makes  rules  of  navigation,  etc. 

4.  It  protects  persons  and  property'  from  violence  both 
by  internal  and  external  foes. 

5.  It  provides  agencies  to  extinguish  fires,  to  protect 
the  public  from  the  peril  of  floods. 

6.  It  maintains  agencies  to  keep  the  people  informed 
concerning  weather  conditions,  trade  opportunities  in  other 
countries,  crop  conditions,  methods  of  fighting  insects 
and  fungus,  etc. 

7.  It  constructs  irrigation  works,  improves  rivers  and 
harbors,  etc. 

8.  It  cares  for  the  public  health  by  creating  agencies  to 
prevent  the  spread  of  contagious  diseases  and  by  providing 
means  for  the  care  of  those  who  are  ill. 


THE   ORGANIZATION   OF  INDUSTRY  99 

Summary. — Business  may  be  conducted  in  many  ways. 
There  may  be  a  single  proprietor,  a  partnership,  or  a 
corporation.  Most  business  in  towns  and  cities  is  done 
by  corporations.  Farming  is  chiefly  managed  by  a  single 
proprietor.  Each  form  of  organization  has  its  advantages 
and  disadvantages. .  Stocks  are  evidences  of  ownership  in 
corporations.  Bonds  are  claims  against  a  corporation. 
Profit-sharing  is  the  admission  of  employees  to  a  share  in 
the  profits.  Co-operation  is  the  management  of  a  busi- 
ness by  the  working  men.  Its  weakness  is  that  it  gener- 
ally dispenses  with  the  services  of  an  entrepreneur.  The 
giving  of  workmen  a  share  in  the  management  of  business 
may  be  secured  by  a  shop  committee,  chosen  by  the  em- 
ployees. This  brings  about  a  degree  of  democracy  in 
industry.  The  State  is  an  important  participant  in  all 
industry.  Without  it  there  could  be  little  production  of 
wealth. 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1.  Why  are  drug  stores  almost  universally  organized  as  corpora- 

tions?    Is  there  any  reason  why  more  drug  stores  are  cor- 
porations than  grocery  stores? 

2.  What  welfare  work  is  done  by  corporations  in  your  city  ?     How 

do  the  employees  regard  it? 

3.  Make  an  investigation  of  profit-sharing  in  your  city. 

4.  Give  an  account  of  any  plants  in  your  city  in  whose  manage- 

ment the  laborers  have  a  share. 

5.  What  lines  of  business  activity  are  undertaken  by  your  city  ? 

Does  the  city  do  this  work  well?     What  improvements  in 
its  methods  can  you  suggest? 

6.  The  post-offices  of  the  larger  cities  are  conducted  at  a  profit  to 

the  national  government,  but  in  many  parts  of  the  country 


loo  THE   ELEMENTS   OF   ECONOMICS 

the  postal  service  is  managed  at  a  loss.  Show  why  it  is 
socially  desirable  that  the  postal  service  be  maintained  even 
at  a  loss?     Why  may  it  be  economically  desirable? 

7.  Local  dealers  often  complain  that  mail-order  houses  hurt  local 

trade.  They  say  that  local  dealers  pay  taxes  and  are  en- 
titled to  local  patronage.  Give  your  opinion  of  their 
arguments. 

8.  Show  some  services  which  the  government  renders  to  indus- 

try net  mentioned  in  the  text. 


CHAPTER    X 

THE  PRINCIPAL  AMERICAN  INDUSTRIES— HUNTING, 
FISHING,  MINING,  AND  LUMBERING 

There  are  economic  and  uneconomic  ways  of  securing  a 
living.  The  person  who  makes  a  living  by  an  economic 
method  renders  some  service  to  the  community.  This  ser- 
vice may  be  the  production  of  some  material  thing  or  the 
rendering  of  some  personal  service.  Unfortunately  some 
people  render  no  economic  service  but  live  at  the  expense 
of  others.  In  this  latter  class  belong  loafers,  thieves, 
gamblers,  and  swindlers  of  all  kinds.  They  are  an  injury 
to  the  economic  life  of  a  people  not  only  because  they 
render  no  service  but  because  they  prey  upon  those  who 
are  rendering  a  service.  Though  small  in  number  they  are 
a  direct  and  an  indirect  expense  to  every  community. 

Classification  of  Economic  Industries. — Industries  may 
be  classified  as  follows: 

1.  Those  which  make  available  elementary  utility. 
Such  industries  are  hunting,  fishing,  lumbering,  mining, 
agriculture,  and  cattle-raising. 

2.  Those  which  produce  form,  place,  and  time  utility. 
Such  industries  are  those  engaged  in  manufacturing,  trans- 
portation, storing,  and  merchandising. 

3.  Those  rendering  personal  services.  To  this  class 
belong  the  services  rendered  by  physicians,  teachers, 
clerks,  servants. 


102  THE  ELEMENTS.  OF  ECONOMICS 

4.  Risk-takers.  To  this  class  belong  all  those  engaged 
in  any  line  of  insurance. 

Extractive  and  Genetic  Industries. — ^An  industry  which 
reduces  the  amount  of  material  furnished  by  nature,  with- 
out any  replacement,  is  called  an  extractive  industry;  an 
industry  which  replaces  any  loss,  or  increases  the  supply, 
is  a  genetic  industry.  Mining  is  an  extractive  industry. 
Lumbering  is  extractive,  but  forest  culture  is  genetic. 
Hunting  is  extractive,  as  is  also  fishing,  at  least  in  inland 
lakes  and  rivers,  but  cattle-raising,  poultry-raising,  and 
fish  culture  are  genetic.  The  future  of  industry  depends 
upon  economy  in  using  materials  that  cannot  be  replaced 
and  in  extending  the  genetic  industries. 

Htinting. — ^Hunting  was  the  first  employment  of  man. 
His  chief  want  was  to  secure  food  and  he  took  the  direct 
method  of  getting  it.  Hunting  included  searching  for 
nuts,  fruits,  and  edible  plants  as  well  as  for  animals.  Able 
to  overtake  few  animals  and  unequal  in  strength  to  most 
of  the  larger  animals,  the  lot  of  primitive  man  was  a  hard 
one.  He  hunted  for  food  and  was  hunted  by  strong  and 
fierce  animals.  His  brain  alone  made  him  superior  to 
other .  animals.  Unless  his  brain  had  been  superior,  he 
would  have  been  exterminated.  The  unknown  benefactor 
who  invented  the  bow  and  arrow  gave  man  supremacy 
over  the  beasts.  This  invention,  some  historians  think,  has 
surpassed  any  other  in  its  services  to  mankind. 

The  American  Indians  before  the  time  of  Columbus  lived 
chiefly  by  hunting  and  fishing,  though  they  already  had  a 
crude  knowledge  of  agriculture.  The  early  colonists  were 
mighty  hunters  and  the  demand  for  furs  for  Europe  made 
the   fur   trade  very  important.     Great  fur-trading   com- 


THE   PRINCIPAL   AMERICAN  INDUSTRIES        103 

panics,  of  which  the  Hudson's  Bay  Company  was  the 
most  important,  played  a  very  great  part  in  the  history  of 
America. 

Hunting  requires  a  large  area  to  support  a  small  popu- 
lation, and  as  the  population  increases  the  animals  are 
driven  farther  and  farther  away.  Hence  the  business  of 
hunting  has  gradually  come  to  an  end  in  the  more  densely 
populated  parts  of  the  country  and  hunting  here  is  only  a 
pastime,  the  average  hunter  spending  more  in  securing 
game  than  it  is  worth  on  the  market.  Much  of  the  game 
has  entirely  disappeared.  The  bison  which  roamed  the 
plains  is  no  more.  The  passenger-pigeons,  whose  flights 
darkened  the  skies  so  late  as  1876  are  gone  forever.  The 
water  fowl  and  deer  are  few  where  once  they  were  many. 
Though  much  of  this  destruction  was  without  adequate 
excuse,  it  should  be  remembered  that  a  better  animal  than 
the  bison  has  taken  its  place.  The  bison  and  the  great 
herds  of  cattle  now  on  the  plains  could  not  both  be  there 
at  the  same  time.  Domesticated  animals  are  more  de- 
pendable than  wild  ones.  Domesticated  fowls  produce 
more  eggs  and  their  flesh  is  more  palatable  than  the  flesh 
of  wild  fowls.  Domestic  sheep  and  swine  are  in  all  respects 
superior  to  their  wild  ancestors. 

There  is  still  considerable  trapping  of  small  animals  such 
as  foxes,  musk-rats,  and  raccoons,  and  the  value  of  the  furs 
so  obtained  is  considerable  in  the  aggregate,  but  it  is  only 
a  fraction  of  what  it  once  was. 

Fishing. — Fishing  is  also  a  very  ancient  method  of 
getting  food.  It  doubtless  requires  more  skill  than  hunt- 
ing, but  the  returns  to  primitive  man  were  uncertain.  The 
fisheries  of  America  were  important  in  colonial  times  and 


I04  THE   ELEMENTS   OF   ECONOMICS 

are  still  valuable.  Fishing  is  both  a  business  and  a  pastime 
in  the  United  States.  Many  streams  and  lakes  have  been 
*' fished  out,"  but  they  may  be  restocked,  unless  their 
waters  have  been  hopelessly  defiled  by  the  pernicious  habit 
of  dumping  sewage  and  other  refuse  into  them.  Even 
the  Great  Lakes  may  lose  their  value  as  producers  of  fish 
unless  scientific  methods  of  keeping  up  the  supply  are 
employed.  Lake  Ontario  was  once  a  great  producer  of 
whitefish,  but  its  supply  of  whitefish  was  practically  ex- 
hausted as  long  as  forty  years  ago,  and  only  recently  are 
these  valuable  fish  again  appearing  in  its  waters.  Both 
the  United  States  Bureau  of  Fisheries  and  state  hatcheries 
are  engaged  in  restocking  our  lakes  and  rivers.  During 
the  year  ending  June  30,  1918,  the  former  distributed 
4,098,105,158  eggs,  fry,  fingerlings,  yearlings,  and  adults. 

The  oceans  afford  an  apparently  inexhaustible  supply  of 
many  varieties  of  edible  fish.  Doubtless  many  fish  that 
are  not  now  used  for  food  can  be  so  used.  The  dogfish,  for 
example,  is  usually  rejected,  but  property  prepared  it  is 
the  equal  in  all  respects  of  many  more  highly  esteemed 
fish. 

The  salmon  fisheries  of  Alaska  are  the  most  valuable  of 
any  of  the  American  fisheries,  and  the  canned  Alaska 
salmon  is  sold  in  every  village  in  the  country.  The  total 
value  of  Alaska  fish  taken  in  the  year  191 7  was  $51,466,- 
980,  most  of  which  was  salmon.  The  fisheries  produce 
much  fertilizer  as  well  as  food,  as  fish  are  rich  in  phos- 
phates. The  last  census  gave  the  number  of  persons  en- 
gaged in  the  fishing  industry  as  166,343. 

Mining. — Coal  is  the  leading  mineral  product  of  the 
United  States.      Though  coal  is  mined  in  many  states, 


THE   PRINCIPAL   AMERICAN   INDUSTRIES        105 

Pennsylvania  leads  all  in  coal  production.  The  demand 
for  coal  has  steadily  increased  and  with  it  has  come  in- 
creased production. 


COAL  PRODUCTION  IN  THE  UNITED  STATES 


Year 


1901 
1906 
1911 
1916 
1918 


Tons  of  Bituminous 


189,567,957 
281,306,058 
372,420,663 
395,200,380 
492,670,146 


Tons  of  Anthracite 


51,221,353 
69,339,152 
75,433,246 
79,459,876 
88,939,117 


Only  about  5  per  cent  of  the  coal  mined  in  the  United 
States  is  exported  in  normal  years  and  our  imports  are 
also  small.  Notwithstanding  increased  production,  prices 
of  both  anthracite  and  bituminous  coal  have  advanced 


5-0 


MILLIONS  OF  LONG  TONS 
100    150    200    250    300    350    400    450    500    550    600 


1870 
1880 
1890 
1900 
1910 
1918 


COAL  PRODUCTION  OF  THE  UNITED  STATES 


steadily  since  191 3.  The  demand  for  coal  for  both  indus- 
trial and  domestic  purposes  has  grown  and  during  the  war 
there  was  an  extraordinary  demand.  The  return  to  nor- 
mal conditions  will  probably  not  reduce  prices  much,  if 


io6 


THE   ELEMENTS   OF  ECONOMICS 


any,  as  wages  and  transportation  charges  will  hardly  be 
lowered,  and  every  year  sees  more  of  the  easily  worked 
veins  exhausted,  which  means  recourse  must  be  had  to 
deeper  veins  and  poorer  mines.  Natural  gas,  extensively 
used  in  many  parts  of  the  United  States,  is  being  rapidly 
exhausted.  There  is  no  reason  to  doubt  that  long  before 
the  coal  supply  approaches  exhaustion,  cheaper  and  better 
means  of  securing  heat,  light,  and  power  will  be  found. 
Water-power,  now  that  it  can  be  converted  into  electric 
power,  is  once  more  approaching  the  importance  it  pos- 
sessed before  the  general  use  of  steam-power,  and  it  prom- 
ises to  grow  in  importance.  The  utilization  of  the  power 
of  the  winds,  the  immense  power  exerted  by  the  tides,  as 
well  as  the  now  unharnessed  power  of  hundreds  of  rivers, 
will  in  time  furnish  all  the  light,  heat,  and  power  needed 
and  at  a  moderate  price. 

Not  less  important  than  coal  is  the  iron  ore  of  the  United 
States.  Indeed  coal  and  iron  are  the  pillars  upon  which 
the  manufacturing  industries  of  the  country  rest.  Iron 
has  been  produced  from  native  ores  from  the  colonial 
period.     The  building  of  railroads  during  the  decade  1830- 


MILLIONS  OF  LONG  TONS 
0   5  10  15  20  25  30  35  4d  45  iO    55  60    65  70  75  80 


PRODUCTION  OF  IRON  ORE  IN  THE  UNITED  STATES 


THE   PRINCIPAL  AMERICAN  INDUSTRIES        107 

1840  both  increased  the  demand  for  iron  and  made  avail- 
able new  supplies.  For  many  years  Pennsylvania  led  all 
states  in  production  of  iron  ore,  but  the  opening  of  the 
Lake  Superior  ore  region  caused  Michigan  to  take  the  lead. 
The  Michigan  ore  is  easily  worked  and  is  loaded  from  open 
pits  by  steam-shovels  directly  into  the  cars,  which  carry  it 
to  the  bunkers  at  the  loading  stations  on  the  Lakes,  from 
which  it  slides  down  chutes  into  the  holds  of  the  ships. 
The  Lake  Superior  region  furnishes  considerably  more  than 
half  of  all  the  iron  ore  used  in  the  United  States.  Ala- 
bama and  Pennsylvania  produce  large  quantities  of  iron 
ore.  The  output  of  iron  ore  has  risen  from  16,000,000  tons 
in  1890  to  over  75,000,000  tons  in  19 18. 

Copper-mining  began  in  the  Lake  Superior  region  about 
1850  and  by  1866  had  reached  a  production  of  8,000  tons. 
Since  then  it  has  enormously  increased,  and  the  rich  mines 
of  Montana  have  made  that  state  a  most  important  copper- 
producing  region.  The  output  in  the  United  States  for 
191 7  was  842,018  tons. 

Gold  became  an  important  product  by  1853,  when  the 
value  of  the  gold  mined  amounted  to  $889,000.  By  1855 
it  had  increased  to  $55,000,000;  since  then  its  production 
has  fluctuated  very  much.  In  191 7  there  was  produced 
in  the  United  States  over  $83,000,000  worth  of  gold. 

Space  does  not  permit  discussion  of  other  mineral  prod- 
ucts, except  that  its  great  and  growing  importance  re- 
quires some  note  must  be  made  of  petroleum  production. 

Though  petroleum  was  long  known  to  exist  in  Pennsyl- 
vania and  was  collected  from  surface  outcropping  and  sold 
as  a  medicine  under  the  name  of  "  Seneca  Oil,"  the  first  well 
was  not  drilled  until  the  famous  Drake  well  in  1859.     The 


io8  THE   ELEMENTS   OF  ECONOMICS 

production  of  oil  in  1859  was  2,000  barrels,  which  sold  at 
twenty-nine  dollars  a  barrel.  The  market  was  not  able  to 
absorb  the  large  production  of  the  next  few  years  which 
ro§e  to  3,000,000  barrels  in  1862,  when  the  price  fell  to 
ten  cents  a  barrel  at  the  well.  The  building  of  pipe-lines 
improved  transportation,  and  improvements  in  refining  and 
better  lamps  gave  a  steady  demand  and  prices  rose  to  re- 
munerative figures. 

Until  the  invention  of  the  internal-combustion  engine 
gasoline  was  of  little  importance  and  was  often  a  waste 
product.  In  the  last  decade  the  demand  for  gasoline  has 
been  tremendous  and  gasoline  is  now  more  valuable  than 
kerosene.  Increased  demand  for  crude-oil  for  fuel  pur- 
poses and  for  oil  for  the  manufacture  of  gas,  as  well  as  the 
demand  for  lubricating-oils  and  gasoline  has  caused  doubt 
as  to  whether  the  wells  could  continue  to  furnish  an  ade- 
quate supply.  The  Great  War  was  ''a  gasoline  war,"  and 
most  of  the  great  nations  of  the  world  are  now  looking  for 
supplies  of  their  own  wherever  indications  show  that  oil  may 
exist.  In  the  meantime,  the  wells  of  the  United  States  are 
producing  increased  supplies,  but  the  price  has  steadily  risen, 
as  the  demand  has  increased  more  rapidly  than  the  supply. 

In  191 7  the  total  production  of  crude-oil  in  the  United 
States  was  335,315,601  barrels,  valued  at  $522,635,213. 
Pennsylvania,  which  long  led  in  petroleum  production,  is 
now  surpassed  in  that  respect  by  Oklahoma,  California, 
Kansas,  Texas,  Illinois,  Louisiana,  and  West  Virginia, 
in  the  order  given.  Production  in  Pennsylvania,  includ- 
ing contiguous  territory  in  New  York,  declined  from 
28,458,208  barrels  in  1890  to  8,612,885  barrels  in  191 7,  and 
this  despite  an  increased  price  for  oil  and  its  stimulating 


no       THE  ELEMENTS  OF  ECONOMICS 

effect  on  drilling.  There  is  little  hope  that  petroleum 
production  can  keep  up  with  demand.  Increased  supplies 
may  come  from  the  shales  of  Colorado  and  new  fields  may 
be  opened,  but  old  fields  are  sure  to  decrease  in  produc- 
tivity. The  only  secure  hope  for  the  future  lies  in  econ- 
omy chiefly  through  the  invention  of  a  more  efficient 
internal-combustion  engine  and  in  the  discovery  of  sub- 
stitutes for  gasoline.  Alcohol,  which  can  be  produced  in 
abundance  from  vegetables,  grain,  and  fruit,  seems  to 
promise  best  as  a  substitute. 

Lumbering. — The  early  colonists  found  the  entire  eastern 
part  of  what  is  now  the  United  States  covered  with  a  dense 
growth  of  timber.  They  had  no  need  to  economize  in  the 
use  of  wood  as  there  was  plenty  and  to  spare.  In  many 
parts  of  the  country  the  trees  were  regarded  as  an  encum- 
brance and  were  cut  and  burned,  or  girdled  and  let  die 
in  order  to  make  room  for  agriculture. 


Relation  between  forest  ^epl^tion  and 
forest   growth   C in  billions  of  cubic  feet) 

'^60  I 

Cut  and  Destruction,  cyinnuallu 

I    6.0  I 

Cyoxoih  o^nnually 

SOFT  WOODS 

J  Cut  and  Destruction 

Gro'Wth 

HARD  WOODS 

I  120 


Gro'Wth 


Cut  and  Destruction 


FROM  "TIMBER  DEPLETION,  LUMBER  PRICES,"  ETC. 


112  THE   ELEMENTS   OF   ECONOMICS 

Much  of  the  timber  that  has  survived  until  our  time  is 
in  places  remote  from  settlements,  or  where  the  soil  is  so 
poor  as  to  make  it  not  worth  while  to  remove  the  trees. 
A  considerable  trade  in  lumber  existed  in  colonial  times. 
As  early  as  1652  there  was  a  sawmill  in  Virginia  ''built 
at  a  cost  of  forty-eight  beaver  skins."  The  first  sawmill 
in  New  England  was  in  operation  at  Dorchester  in  1628. 
Dutch  colonists  built  many  mills  along  the  Hudson  valley. 
The  first  settlers  in  Maine  and  New  Hampshire  were  lum- 
bermen. 

Lumber  for  export  consisted  of  materials  for  ships,  such 
as  masts  and  spars,  staves,  shingles,  hoops,  and  boards. 

As  the  trees  became  scarce  in  one  locality,  the  lumbering 
industry  steadily  pushed  its  way  into  more  remote  places. 
Unfortunately  forest  culture,  the  genetic  side  of  the  indus- 
try, has  not  kept  step  with  forest  destruction. 

"Less  than  5  per  cent  of  the  virgin  forests  of  New  Eng- 
land remain,  and  the  total  stand  of  saw  timber  in  these 
states  is  not  more  than  one-eighth  of  the  original  stand. 
New  York,  once  the  leading  state  in  lumber  production, 
now  manufactures  only  30  board  feet  per  capita  yearly, 
although  the  requirements  of  its  own  population  are  close 
to  300  board  feet  per  capita.  The  present  cut  of  lumber 
in  Pennsylvania  is  less  than  the  amount  consumed  in  the 
Pittsburgh  district  alone.  The  original  pine  forests  of  the 
Lake  States,  estimated  at  350,000,000,000  feet,  are  now 
reduced  to  less  than  8,000,000,000  feet,  and  their  yearly 
cut  of  timber  is  less  than  one-eighth  of  what  it  used  to  be. 
These  four  densely  populated  regions,  containing  them- 
selves very  large  areas  of  forest  land,  are  now  largely  de- 
pendent upon  timber  grown  and  manufactured  elsewhere 


THE   PRINCIPAL   AMERICAN   INDUSTRIES        113 

and  are  becoming  increasingly  dependent  upon  timber 
which  must  be  shipped  the  width  of  the  continent. 

''  The  bulk  of  the  building  lumber  and  structural  timbers 
used  in  the  Eastern  and  Central  States  during  the  last 
fifteen  years  was  grown  in  the  pine  forests  of  the  South. 
The  virgin  pine  forests  of  the  South  Atlantic  and  Gulf 
States  have  been  reduced  from  about  650,000,000,000 
board  feet  to  about  i39,ooo',ooo,ooo  feet.  The  production 
of  yellow-pine  lumber  is  now  falling  off  and  within  ten 
years  will  probably  not  exceed  the  requirements  of  the 
Southern  States  themselves. 

''  The  United  States  at  one  time  contained  the  most  ex- 
tensive temperate  zone  hardwood  forests  in  the  world. 
One  region  after  another  has  been  cut  out.  The  pro- 
duction of  hardwood  products  on  the  past  scale  cannot  be 
long  continued.  The  scarcity  of  high-grade  oak,  poplar, 
ash,  hickory,  walnut,  and  other  standard  woods  is  now 
placing  many  American  industries  in  a  critical  condition. 

''The  depletion  of  forest  resources  is  not  confined  to  saw 
timber.  Since  1909,  the  country  has  ceased  being  self-sup- 
porting in  newsprint  paper  and  now  imports  two- thirds  of 
the  pulp,  pulp  wood,  or  newsprint  which  we  require.  This 
condition  is  due  in  part  to  timber  depletion,  in  part  to  fail- 
ure of  the  paper  industry  to  expand  in  our  Western  forest 
regions  as  the  lumber  industry  has  expanded.  In  1919  the 
production  of  turpentine  and  rosin  had  fallen  off  50  per  cent. 
Within  ten  years  the  United  States  will  lose  its  commanding 
position  in  the  world's  market  for  these  products  and  may 
in  time  be  unable  to  supply  its  domestic  requirements."  * 

*  "  Timber  Depletion,  Lumber  Prices,  Lumber  Exports  and  Concentra- 
tion of  Timber  Ownership."  Report  on  Senate  Resolution  311.  Govern- 
ment Printing  Ofl&ce,  1920. 


114 


THE   ELEMENTS   OF   ECONOMICS 


Timber  Depletion  and  Prices. — Prices,  both  whole- 
sale and  retail,  have  increased  as  the  supply  has  dimin- 
ished. It  will  be  seen  from  the  following  table,  that 
increased  prices  of  transportation  have  been  an  important 
factor  in  retail  prices.  The  table  is  for  prices  in  southern 
Minnesota  and  the  increased  prices  are  partly  due  to  the 
increased  amount  of  Western  lumber  which  was  imported 
in  order  to  supply  needs  which  a  few  years  ago  were  amply 
supplied  by  neighboring  forests. 

Prices  throughout  the  United  States  have  risen  to  about 
the  same  extent  as  in  Minnesota.  The  prices  are  generally 
conceded  to  be  unreasonably  high,  and  they  have  partly 
been  caused  by  the  bidding  up  to  the  present  figures  by 


RETAIL   PRICES   OF   LUMBER 


Years 


1905 
1906 
1907 
1908 
1909 
1910 
1911 
1912 

1913 
1914 

1915 
1916 
1917 
T918 
1919 


Average  Retail 
Selling  Price 


Per 

Thousand 


$26 
31 
34 
31 
30 
31 
31 
30 
32 
31 
30 
31 
3S 
46 
54 


Per  Cent 
Increase 


22, 
16 
21 . 
19. 
18, 

22. 
16. 
20.7 
48.0 
78.6 
109.0 


Average  Transpor- 
tation Cost 


Per 
Thousand 


Per  Cent 
Increase 


0.0 
30.8 
23.0 
23.0 

38.5 

46.0 

46.0 

77.0 

107.8 

146.0 

161. 5 

130-5 
146.0 
231.0 
262.0 


Portion  of  Average 

Retail  Selling  Price 

Absorbed  by 

Transportation 


Per  Cent 


12.5 
13-4 
II-5 
12.6 

14-7 
15.0 
15.2 
18.7 
20.9 

25  I 
27.9 

23 -9 
20.8 
23.1 
21.6 


Per  Cent 
Increase 


0.0 

7-2 

8.0 

0.8 

17.6 

20.0 

21.6 

49.6 

67.2 

100.8 
132.2 

91  .  2 
66.4 
84.8 
72.8 


ii6  THE   ELEMENTS   OF   ECONOMICS 

buyers  themselves.  **It  is  a  little  too  much  strain  on 
human  nature  to  expect  that  producers  shall  refuse  to 
accept  the  highest  prices  offered  for  their  goods." 

The  depletion  of  timber  in  the  United  States,  in  the 
opinion  of  the  experts  of  the  Forest  Service,  has  not  re- 
sulted from  the  use  of  our  forests,  but  from  their  devas- 
tation, caused  by  forest-fires  and  by  methods  of  cutting 
which  destroy  or  prevent  new  timber  growth.  It  is  said 
that  the  enormous  area  of  forest  land  in  the  United  States, 
much  of  it  unsuited  to  other  uses,  would  provide  an  ample 
supply  of  wood,  if  it  were  kept  productive. 

The  Forest  Service  of  the  United  States  has  done  much 
to  preserve  the  forests  which  belong  to  the  nation  and  to 
increase  the  area  of  forest  lands  by  setting  out  millions  of 
young  trees.  In  1919  there  were  about  160  national  for- 
ests, with  a  total  area  of  162,000,000  acres.  The  forests 
belonging  to  the  nation  are  not  merely  preserved,  but  are 
made  useful.  The  trees  which  are  matured  are  cut  and 
the  timber  marketed,  but  as  a  new  crop' is  always  growing, 
the  forests  are  not  destroyed. 

Summary. — There  are  two  ways  of  securing  a  living: 
one  is  economic  and  the  other  is  uneconomic.  Every  per- 
son who  helps  to  produce  some  useful  object  or  who  renders 
some  helpful  service  is  making  a  living  by  an  economic 
method. 

The  economic  industries  are  either  extractive  or  genetic. 
Hunting,  fishing,  lumbering,  and  mining  are  extractive 
industries.  Stock-raising,  fish  culture,  agriculture,  and 
forestry  are  genetic. 

Hunting  is  the  most  ancient  method  of  getting  food  and 
clothing.     It   can   be    the   principal   industry   only   when 


THE   PRINCIPAL   AMERICAN   INDUSTRIES        117 

population  is  sparse.  Hunting  is  now  chiefly  a  pastime 
in  the  United  States,  but  it  was  once  an  important  indus- 
try. Fishing  is  both  a  pastime  and  an  industry.  The 
supply  of  game  and  fish  may  be  increased  by  making  it 
illegal  to  hunt  or  fish  during  certain  periods  of  the  year 
and  by  stocking  woodlands  and  streams. 

Mining  is  an  extractive  industry.  Economy  in  the  use 
of  products  of  the  mines  is  necessary.  There  is  no  genetic 
side  to  the  mining  industry. 

Forestry  is  the  genetic  side  of  lumbering.  As  a  result  of 
a  campaign  of  education  conducted  by  the  Boone  and 
Crockett  Club,  of  which  Theodore  Roosevelt  was  a  leading 
member,  Congress  in  1891  passed  the  Forestry  Reserve  Act. 
Under  this  act  Presidents  Harrison,  Cleveland,  and  Mc- 
Kinley  reserved  35,000,000  acres  of  forest  lands.  The 
greatest  advance  in  forestry  was  made  in  President  Roose- 
velt's administrations.  In  1898  Mr.  Gifford  Pinchot  be- 
came chief  of  the  Division  of  Forestry,  which  was  attached 
to  the  General  Land  Office  of  the  Department  of  the 
Interior.  In  1901  the  Division  of  Forestry  became  the 
Bureau  of  Forestry,  and  in  1905  Congress  made  it  the 
Forest  Service.  The  duties  of  the  Forest  Service  include 
protection  of  the  forest  lands  from  fire  and  from  lumber 
thieves.  The  Forest  Service  has  made  a  study  of  forestry 
problems  and  has  promoted  forestry  on  private  and  State 
lands  as  well  as  upon  the  national  domain.  Through  the 
work  of  the  Forest  Service  not  only  is  the  supply  of  tim- 
ber conserved,  but  the  watersheds  are  protected.  When 
all  trees  are  removed  there  is  ''low  water  or  no  water  at 
all  during  the  long  dry  periods,  and  destructive  floods 
after  heavy  rains."     The  floods  wash  the  top-soil  into  the 


ii8  THE  ELEMENTS   OF   ECONOMICS 

rivers,  with  the  double  injury  of  depriving  the  land  of 
much  of  its  most  fertile  elements  and  filling  up  the  bot- 
toms of  the  rivers. 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1.  What  are  the  chief  industries  of  your  city?     Of  your  state? 

2.  Have  there  been  any  changes  in  the  kinds  of  industry  followed 

in  your  community  during  the  last  fifty  years?  What  are 
the  reasons  for  these  changes? 

3.  Are  there  any  people  in  your  state  who  make  a  living  by  hunt- 

ing or  fishing  ?  How  does  their  number  compare  with  those 
so  engaged  fifty  years  ago  ?     Why  ? 

4.  Find  the  prices  of  coal  and  building  materials  ten  years  ago  and 

compare  them  with  present  prices.  What  has  caused  the 
change?  What  do  you  think  prices  will  be  ten  years  from 
now? 

5.  What  has  been  done  by  your  state  in  the  line  of  conservation 

of  its  natural  resources?  How  may  an  individual  aid  in 
conservation  of  resources? 

6.  How  may  organizations  such  as  the  Boy  Scouts  and  the  Girl 

Scouts  render  services  to  the  community  in  protecting 
forests  ? 

7.  What  advantage  to  a  community  are  the  song-birds?     How 

may  birds  be  attracted  to  a  community?  What  are  the 
chief  enemies  of  birds?  How  may  birds  be  protected  from 
their  enemies? 


CHAPTER  XI 

THE  PRINCIPAL  INDUSTRIES  OF  THE  UNITED  STATES- 
STOCK-RAISING  AND  AGRICULTURE 

Stock-Raising. — Every  animal,  except  the  turkey,  now 
domesticated,  had  reached  that  condition  in  unknown 
antiquity.  The  same  instinct  that  leads  a  boy  to  take 
home  a  wild  rabbit  and  try  to  tame  it  operated  in  ancient 
times.  Wild  animals  were  at  first  probably  tamed  as 
companions  rather  than  for  economic  purposes. 

Ever  since  the  beginning  of  recorded  history  domestic 
animals  have  been  of  economic  service  to  man.  Domestic 
animals  have  not  only  been  valuable  in  furnishing  materials 
for  food  and  clothing,  but  they  have  furnished  power  for 
transportation  and  machinery.  Horses  are  still  the  chief 
reliance  of  farmers  for  ploughing,  harrowing,  and  other 
farm  operations,  though  power  supplied  by  internal- 
combustion  engines  will  soon  be  doing  a  large  part  of  farm 
work. 

In  the  United  States  cattle  and  sheep  raising,  as  the 
chief  industry,  has  gradually  moved  westward  as  agricul- 
ture has  claimed  the  land.  Most  of  the  cattle  are  now 
raised  in  states  west  of  the  Mississippi  and  on  lands  not 
well  adapted  to  agriculture,  though  they  are  often  fattened 
in  the  states  of  the  ''corn  belt."  The  cattle  ranges  have 
diminished  in  the  West  and  with  the  loss  of  the  best  feed- 
ing-grounds the  price  of  cattle  has  steadily  increased. 

The  raising  of  live  stock  is  the  principal  industry  in 

119 


I20  THE   ELEMENTS   OF   ECONOMICS 

the  semi-arid  districts  of  Colorado,  Montana,  Texas,  and 
Wyoming.  The  United  States  leads  all  nations  in  extent 
and  value  of  live  stock. 

Quite  distinct  from  the  cattle-raising  industry  is  the 
dairying  industry.  It  flourishes  in  most  parts  of  the 
United  States,  especially  in  the  ''corn  belt,"  though  New 
York  leads  all  states  in  the  quantity  and  value  of  dairy 
products.  Easy  and  rapid  transportation  to  city  markets 
is  a  most  important  consideration  in  reference  to  milk,  the 
greatest  dairy  product. 

Agriculture. — ^An  advance  of  vast  importance  was  made 
when  men  first  undertook  to  raise  cereals  and  plants.  Not 
only  was  the  supply  largely  increased,  but  better  varieties 
were  produced  by  removing  competition  of  other  plants, 
preparing  the  soil,  and  by  saving  the  best  of  the  crop  for 
seed.  A  larger  population  became  possible  and  the  in- 
stitution of  private  property  in  land  arose. 

Agriculture,  until  comparatively  recent  times,  was 
merely  scratching  the  surface  of  the  ground  and  cultiva- 
tion was  of  the  crudest  kind.  By  experience  it  was 
learned  that  certain  soils  were  better  than  others,  and 
that  the  same  crops  could  not  be  grown  year  after  year 
upon  the  same  piece  of  ground,  and  rotation  of  crops  was 
introduced  as  well  as  fertilization  of  the  soil.- 

Agriculture  is  now  and  always  has  been  the  most  im- 
portant single  industry  in  the  United  States,  both  in  the 
value  of  products  and  the  number  of  persons  employed. 
Indian  corn,  or  maize,  was  extensively  grown  by  the  early 
settlers.  It  required  little  cultivation  and  would  grow 
well  upon  new  soil.  Maize  has  always  been  the  greatest 
of  our  cereal  crops,  and  is  now  grown  in  every  state  of  the 
Union,  but  most  extensively  in  the  ''corn  belt,"  comprising 


INDUSTRIES   OF   THE   UNITED   STATES  121 

Illinois,  Iowa,  Kansas,  Missouri,  and  parts  of  Indiana  and 
Nebraska. 

Corn  is  chiefly  used  as  a  food  for  live  stock,  though  in- 
creasing quantities  are  being  used  for  human  consumption 
in  the  form  of  corn-meal,  corn  syrups,  and  salad-oils. 


1870 
1880 
1890 
1900 
1910 
1917 


500 


MILLIONS  OF   BUSHELS 

1000  1500  2000 


2500 


3000 


CORN  PRODUCTION  OF  THE  UNITED  STATES 


The  following  table,  compiled  from  the  Repotts  of  the 
Department  of  Agriculture,  gives  some  idea  of  the  size 
and  value  of  the  corn  production  of  our  country. 


Year 

Area 

Production 

Farm  Value 
December  i 

Farm 
Value 

per 
Bushel 

Yield 
per 
Acre 

1900 

1905 
1910 

1915 
1916 
1917 
1918 

Acres 
83,320,872 
94,011,869 
104,035,000 
106,197,000 
105,296,000 
116,730,000 
107,494,000 

Bushels 
2,105,102,516 
2,707,993,540 
2,886,260,000 
2,994,793,000 
2,566,927,000 
3,065,233,000 
2.582,814,000 

Dollars 
751,229,034 
1,116,696,738 
1,384,817,000 
1,722,680,000 
2,280,729,000 
3,920,228,000 
3,528,313,000 

Cen 

35 
41 
45 
57 
88 
127 
136 

ts 
7 
2 
0 
5 
9 
9 
0 

Bushels 

25-3 
28.8 

27.7 
28.2 
24.4 
26.3 
24.0 

Though  not  equal  in  quantity  or  value  to  the  corn  crop, 
wheat  is  the  next  most  important  cereal  crop  of  the  United 
States.      Wheat  is  grown  in  every  state,  but  the  great 


122 


THE   ELEMENTS   OF  ECONOMICS 


wheat  states  are  Minnesota,  the  Dakotas,  Kansas,  and 
Nebraska.  Unlike  corn,  of  which  we  export  comparatively 
small  quantities,  wheat  is  one  of  the  large  export  crops  of 
the  United  States.  In  the  year  1913,  there  was  exported 
from  the  United  States  19.57  P^r  cent  of  the  domestic  crop. 


200 


MILLIONS  OF  BUSHELS 

300       400        500       600        700 


800       900 


1870 
1880 
1890 
1900 
1910 
1918 


I 
WTIEAT  PRODUCTION  OF  THE  UNITED  STATES 

During  the  Great  War  the  percentage  of  wheat  exported 
reached  abnormal  figures,  being  37.31  per  cent  in  191 5; 
23.70  per  cent  in  1916;  31.99  per  cent  in  1917.. 


WHEAT  PRODUCTION  AND  VALUE 

Compiled  from  Reports  of  the  Department  of  Agriculture 


Yea 

r                Area 

Production 

Farm  Value 
December  i 

Farm 
Value 

per 
Bushel 

Yield 
per 
Acre 

Acres 

Bushels 

Dollars 

Cents 

Bushels 

1900 

.  .  .      42,495,385 

522,229,505 

323,515,177 

61 .9 

12.3 

1905 

.  .  .      47,854,079 

692,979,489 

518,372,727 

74 

8 

14 

5 

1910 

.  .  .      45,681,000 

635,121,000 

561,051,000 

88 

3 

13 

9 

1915 

.  .  .       60,469,000 

1,025,801,000 

942,303,000 

91 

9 

17 

0 

1916 

52,316,000 

636,318,000 

1,019,968,000 

160 

3 

12 

2 

1917 

.  .  .      45,089,000 

636,655,000 

1,278,112,000 

200 

8 

14 

I 

1918 

59,110,000 

917,100,000 

1,874,623,000 

204 

4 

15-5 

124 


THE   ELEMENTS   OF   ECONOMICS 


Hay  is  the  largest  single  crop  produced  in  the  United 
States.  The  total  amount  of  hay  and  forage  crops  cannot 
be  given,  as  large  quantities  are  consumed  by  cattle  in 
pastures,  but  the  crop  of  1918,  after  pasturage  had 
been  finished  was  75,459,000  short  tons,  valued  at  $1,522,- 
473,000. 

The  great  staple,  cotton,  was  grown  in  the  South  before 
the  Revolutionary  War,  but  the  invention  of  the  cotton- 


MILLIONS  OF  Five  HUNDRED   POUND   BALES 
0         1         2         3         4        5         6'^        7         8        ^      10       11       12 


1870 
1880 
1890 
1900 
1910 
1918 


COTTON  PRODUCTION  OF  THE  UNITED  STATES 


gin  in  1792  by  Eli  Whitney  caused  cotton  to  become  the 
most  important  crop  of  the  southern  tier  of  states.  Be- 
fore Whitney's  invention  seeds  were  removed  from  the 
cotton  by  hand  or  by  a  roller-mill.  A  slave  could  clean 
five  pounds  per  day  by  hand,  or  sixty-five  by  the  mill. 
The  cotton-gin  enabled  a  slave  to  clean  300  pounds  per 
day  and  with  improvement  in  the  gin  the  amount  was 
soon  increased. 

At  first  most  of  the  cotton  was  exported  to  England,  but 
with  the  growth  of  the  textile  factories  in  New  England, 
and  later  in  the  South,  the  domestic  consumption  of  cotton 
increased  and  in  1918  only  40.58  per  cent  of  the  cotton 


From  a  photograph  by  Publishers  Photo  Service 

HARVESTING 


From  a  photograph  by  Brown  Brothers 
PLOUGHING  BY  A  GANG-PLOUGH  PULLED  BY  A  TRACTOR 

Machinery  in  use  on  a  Western  farm 


126  THE   ELEMENTS   OF  ECONOMICS 

crop  was  exported.  The  production  of  cotton  for  the  year 
ending  July  31,  1918,  was  11,302,000  bales  of  500  pounds 
each.  Chiefly  on  account  of  conditions  brought  about  by 
the  war,  the  value  of  the  crop  of  19 18  was  more  than  twice 
the  average  value  for  recent  years. 

Tobacco  has  been  an  important  crop  in  many  sections 
of  the  country  since  its  early  settlement,  but  unlike  cotton, 
tobacco  may  be  grown  in  the  North,  and  Connecticut  and 
Wisconsin  are  among  the  states  producing  considerable 
quantities  of  tobacco.  Kentucky  produced  427,500,000 
pounds  out  of  a  total  crop  for  1918  of  1,340,019,000  pounds. 
North  Carolina  and  Virginia  are  next  in  tobacco  production. 
Tobacco  is  most  exhausting  to  the  soil  and  heavy  fertiliza- 
tion or  resort  to  new  lands  is  necessary  for  its  successful 
growth. 

Sugar-cane  has  been  grown  in  several  southern  states, 
but  only  in  Louisiana  has  it  become  of  any  great  impor- 
tance. From  Louisiana  cane  there  were  produced  in  the 
year  ending  March,  1919,  546,862,400  pounds  of  sugar. 
The  States  of  California,  Colorado,  Idaho,  Michigan,  Ohio, 
and  Utah  produced  most  of  the  sugar-beets,  from  which, 
in  the  year  ending  March  31,  1919,  1,510,128,000  pounds 
of  sugar  were  made.  In  the  year  ending  June  30,  1918, 
Porto  Rico  sent  672,937,334  pounds  of  sugar  to  the  United 
States,  and  Hawaii  sent  1,080,908,797  pounds. 

Americans  are  among  the  greatest  of  sugar  consumers, 
averaging  about  80  pounds  a  year  per  capita;  51  per  cent 
of  the  sugar  consumed  in  19 18  was  imported  from  foreign 
countries. 

Intensive  and  Extensive  Cultivation. — Where  land  is 
expensive  as  compared  to  labor  and  fertilizers,  it  pays  to 


INDUSTRIES   OF   THE   UNITED    STATES  127 

invest  a  large  amount  per  acre  in  labor  and  fertilizers. 
This  is  known  as  intensive  agriculture.  In  Europe  inten- 
sive agriculture  is  the  rule.  The  market  gardens  near  the 
large  American  cities  also  are  examples  of  intensive  agri- 
culture. In  America  there  is  a  larger  use  of  machinery 
than  in  Europe,  because  labor  here  is  expensive  as  com- 
pared with  machinery. 

Where  land  is  cheap  and  labor  and  fertilizers  are  ex- 
pensive, it  pays  better  to  spread  an  investment  of  capital 
and  labor  over  a  large  area  of  land;  this  is  extensive  agri- 
culture. 

Whether  extensive  or  intensive  agriculture  is  employed 
depends  wholly  upon  the  comparative  expense  of  land, 
labor,  and  capital.  Though  the  wheat  lands  of  the  Red 
River  Valley  of  North  Dakota  are  not  surpassed  in  fer- 
tility by  any  wheat  lands  in  the  world,  a  small  amount 
of  labor  and  capital  is  expended  per  acre  and  as  a  re- 
sult land  much  inferior  in  Europe  yields  a  larger  crop 
per  acre  than  the  Dakota  lands.  However,  the  cost  per 
bushel  is  less  in  North  Dakota  than  in  any  European 
country. 

The  Law  of  Diminishing  Returns  in  Agriculture. — With 
additional  investments  of  labor  and  capital  upon  a  given 
area  of  land,  the  point  will  be  reached  when  returns  will 
not  be  proportionate  with  the  increased  investments.  For 
a  time  there  will  be  increased  returns,  until  the  point  of 
maximum  return  is  reached  and  then  returns  diminish  in 
proportion  to  the  investment,  and  it  pays  better  to  take 
up  another  piece  of  land  than  to  cultivate  more  extensively 
the  old.  The  following  example  in  the  production  of 
potatoes  illustrates  the  law  of  diminishing  returns. 


128  THE   ELEMENTS   OF   ECONOMICS 


Units  of  Invest- 

ment of  Labor 

and  Capital  per 

Return  per  unit  of  Labor 

Acre 

Returns  per  Acre 

and 

Capital 

I 

f    75 

bushels 

75 

2 

Increasing   J  i8o 
returns     '  325 

" 

90 

3    • 

" 

108.33 

4 

I  450 

« 

112.5 

5 

Diminishing  (525 

<( 

105 

6 

returns      1 600 

(t 

100 

Knowledge  of  scientific  agriculture  makes  it  possible  to 
raise  increased  crops  on  a  given  area  of  land,  but,  as  every 
farmer  knows,  the  point  comes  when  additional  invest- 
ment per  acre  does  not  pay. 

The  law  of  diminishing  returns  may  also  be  proved  by 
showing  the  absurdity  of  the  contrary.  For,  if  the  law  of 
diminishing  returns  were  not  true,  enough  potatoes  to  feed 
the  whole  world  could  be  produced  from  a  single  acre  of  land 
by  simply  increasing  the  expenditure  of  labor  and  capital. 

The  Marginal  Product  of  Labor  and  Capital. — In  agri- 
culture, as  in  all  production  of  wealth,  the  farmer  has  the 
option  of  combining  labor  and  capital  as  he  thinks  most 
advantageous.  If  labor  is  expensive,  he  will  try  to  sub- 
stitute machinery  for  part  of  the  labor.  The  point  which 
he  must  consider  is  whether  additional  labor  earns  its 
wages  and  whether  additional  machinery  pays  interest  on 
the  investment  and  provides  for  its  renewal  when  worn 
out.  If  able,  the  farmer  will  continue  to  employ  additional 
labor,  until  the  point  is  reached  when  the  laborer  only  pro- 
duces enough  to  pay  his  wages.  The  laborer  who  just 
produces  enough  to  pay  his  wages  is  called  ''the  marginal 
laborer";  he  is  not  necessarily  the  last  laborer  employed, 
but  any  laborer  when  the  investment  of  labor,  land,  and 
capital  has  reached  a  certain  point. 


From  a  photograph  hy  Brown  Brothers 


/%    A.     .Jk.        lb. 


t^> 


4^  A 


ii,.t#'^-»>^.4l'.%> 


From  a  photograph  by  Publishers  Photo  Service 

FARM  LANDS  IN  NEW  ENGLAND  AND  MONTANA 

In  New  England  the  machinery  used  on  a  Western  farm  could  not  be  employed. 
Do  you  wonder  that  wheat  is  produced  cheaf)er  in  the  West? 


I30  THE   ELEMENTS   OF   ECONOMICS 

In  the  same  way  he  will  invest  capital,  if  he  can,  until 
the  point  is  reached  when  it  just  returns  enough  to  ma^ 
it  pay;  this  point  is  that  of  the  ''marginal  productivity" 
of  capital.  j 

Scientific  Agriculture. — No  business  requires  greatier 
knowledge  than  that  of  farming.  A;  farmer,,  in  order  ito 
make  the  most  of  his  caUing,  must  be  something  of!  a 
mechanic;  must  know  much  concerning  the  care  of  ani- 
mals; must  have  some  knowledge  of  such  matters  as  tjie 
chemistry  of  the  soil,  fertilizers  and  their  uses,  rotation  of 
crops,  modes  of  fighting  insects,  fungus,  and  other  pests; 
must  be  able  to  keep  accounts  and  to  attend  to  buying  and 
marketing. 

Scientific  agriculture  is  that  method  of  agriculture  that 
enables  the  farmer  to  make  the  best  use  of  his  opportunities. 
The  teaching  of  agriculture  in  schools  and  colleges  and  the 
published  reports  of  the  United  States  Department  of 
Agriculture  and  state  experiment  stations,  have  done 
much  to  raise  the  standard  of  agriculture  in  the  United 
States. 

Urban  and  Country  Population. — The  table  on  next  page 
shows  the  increase  in  the  urban  population  of  the  United 
States  since  1790,  the  year  of  the  first  census. 

Decline  in  Rural  Population.— The  relative  decline  in 
the  rural  population  is  partly  explained  by  the  fact  that 
every  labor-saving  device  suitable  to  agriculture  diminishes 
the  amount  of  labor  necessary  on  the  farm  and  increases 
the  demand  for  labor  in  the  city  factories.  Likewise  all 
improvements  in  transportation  tend  to  hurt  business  in 
the  small  villages  by  making  it  easy  to  get  supplies  from 
the  cities. 


INDUSTRIES   OF   THE   UNITED    STATES 


131 


Census  Years 


Total 
Population 


Urban 
Population* 


Number 
of  Places 


Per  cent  of 

Urban  of 

Total  Popu 

lation 


IQ20 
IQIO 
IQOO 

1890 
1880 
1870 
i860 
1850 
1840 
1830 
1820 
1810 
1800 
1790 


105,683,108 
91,972,266 

75,994i575 
62,622,250 

50,155,783 
38,558,371 
31,443,321 
23,191,876 
17,069,453 
12,866,020 

9,638,453 
7,239,881 
5,308,483 
3,929,214 


54,816,209 

42,623,383 

30,797,185 

18,272,503 

11,318,547 

8,071,875 

5,072,256 

2,897,586 

1,453,994 
864,509 

475,135 
356,920 
210,873 
131,472 


2,405 
1,894 

447 

286 

226 

141 

85 

44 

26 

13 

II 

6 

6 


51  9 
46.3 
40.5 
29.  2 
22.6 
20.9 
16. 1 

12-5 

8.5 
6.7 
4-9 
4-9 
4.0 

3-4 


*  Population  of  places  of  8,000  inhabitants  or  more  at  each  census, 
except  for  1920,  1910,  and  1900,  in  which  cases  all  places  over  2,500  are 
included. 


During  the  Great  War  the  opportunities  for  employ- 
ment at  high  wages  in  the  cities  drained  the  country  of 
much  of  its  agricultural  labor.  It  is  true  that  the  lure  of 
the  city  attracted  many,  but  the  economic  argument 
doubtless  had  the  most  influence.  The  end  of  the  war 
saw  a  return  of  many  agricultural  laborers  to  the  country, 
but  the  scarcity  of  labor  continues  to  be  one  of  the  great 
difficulties  of  American  farmers. 

The  eight-hour  day  is  less  common  on  farms  than  in 
factories.  During  harvest  season  twelve  hours  usually 
constitute  a  day's  work  and  ten  hours  in  the  winter.  But 
there  are  compensations.  The  employer  and  the  employee 
usually  work  together  and  a  better  understanding  exists 
between  them  than  in  factory  work.     The  work  is  chiefly 


132  THE   ELEMENTS   OF   ECONOMICS 

out  of  doors  and  is  not  onerous  for  a  man  of  good  physical 
powers.  It  is  probably  true  that  ten  or  twelve  hours  in 
farm  labor  is  not  more  exhausting  thail  eight  hours  in  a 
factory. 

Size  of  Farms. — In  the  United  States  most  farms  are 
small.  There  are  many  large-  farms,  but  the  average  farm 
in  1910  was  138  acres,  while  in  1850  it  was  202  acres.  As 
intensive  farming  becomes  more  common,  the  size  of  the 
average  farm  may  be  expected  to  decline. 

The  United  States  census  authorities  regard  a  ^'farm" 
as  all  the  land  which  is  directly  farmed  by  one  person, 
either  by  his  own  labor  alone  or  with  the  assistance  of 
members  of  his  household  or  hired  employees.  When  a 
landholder  has  one  or  more  tenants,  renters,  croppers,  or 
managers,  the  land  operated  by  each  is  considered  a 
''farm."  In  1900  the  number  of  farms  in  the  United 
States  was  5,737,372.  In  19 10  the  number  had  increased 
to  6,361,502,  an  increase  of  10.9  per  cent  during  the  decade. 
By  1920  the  number  had  reached  6,449,998,  but  the  in- 
crease during  the  last  decade  was  only  1.4  per  cent. 

Marketing  of  Farm  Products. — The  difference  between 
the  price  of  agricultural  products  at  the  farm  and  in  the 
city  retail  markets  has  been  a  matter  of  comment  for  many 
years.  As  this  chapter  is  being  written,  potatoes  may  be 
purchased  from  farmers  in  Suffolk  County,  Long  Island, 
for  $1.50  a  bushel,  while  they  are  selling  in  Brooklyn,  only 
sixty  miles  away,  at  $3.50  a  bushel;  the  best  green  corn 
costs  twenty-five  cents  a  dozen  at  the  farm  in  Suffolk 
County  and  sells  at  retail  in  Brooklyn  at  sixty  cents. 
The  usual  method  of  marketing  most  farm  products  is  to 
consign  them  to  a  commission  merchant,  who  sells  them 


INDUSTRIES   OF   THE   UNITED    STATES  133 

for  the  farmer  on  commission,  or  else  the  farmer  takes 
them  by  truck  to  a  wholesale  market  and  sells  directly  to 
retail  dealers. 

The  farmers  have  frequently  complained  that  the  com- 
mission men  do  not  give  them  an  honest  price  for  their 
goods.  Most  commission  men  are  honest  and  the  farmer 
can  be  protected  from  the  dishonest  dealer.  Laws  pro- 
viding for  the  licensing  and  regulating  of  commission 
business  have  been  passed  in  many  states  and  these  pro- 
vide for  revoking  of  licenses  in  case  of  offenses  such  as 
the  following:  making  charges  for  services  not  rendered; 
misrepresenting  the  condition  of  goods  when  received; 
misrepresenting  prices  or  market  conditions;  failure  to 
make  prompt  payments;  or  combining  to  corner  the 
market.  Where  such  laws  are  properly  enforced,  there  is 
little  cause  to  complain  of  the  actions  of  commission 
merchants. 

It  is  often  claimed  that  the  retail  dealer  is  a  profiteer. 
The  differences  between  wholesale  and  retail  prices  of  farm 
products  are  frequently  great,  but  it  must  be  remembered 
that  farm  products  are  perishable  and  the  retail  dealer  is 
a  risk-taker. 

In  some  cities,  like  Baltimore,  Washington,  and  Indian- 
apolis, there  are  large  retail  markets  maintained  by  the 
city  in  which  stalls  are  rented  to  farmers  and  others  at 
reasonable  rates,  and  as  a  result  direct  contact  is  made 
between  producer  and  consumer  to  the  benefit  of  each. 

Co-operative  marketing  by  associations  of  farmers,  like 
the  California  Fruit  Growers  and  Shippers  Association, 
which  sells  its  products  directly  to  dealers,  has  benefited 
the  producer,  but  has  not  served  to  lower  retail  prices. 


134  THE   ELEMENTS   OF  ECONOMICS 

Summary. — Hunting  has  given  place  in  the  United 
States  to  stock-raising.  Better  animals  can  be  grown 
when  domesticated  than  are  produced  when  they  are  wild. 
Cattle-raising,  except  for  dairying,  is  now  chiefly  confined 
to  the  semi-arid  districts  of  Colorado,  Montana,  Texas, 
Wyoming,  and  parts  of  neighboring  states.  Agriculture  is 
still  the  leading  industry  of  the  United  States.  Our  chief 
crops  are  corn,  wheat,  hay,  cotton,  and  tobacco.  Inten- 
sive farming  is  the  investment  of  a  large  amount  of  capital 
and  labor  upon  a  certain  area  of  land.  Extensive  agricul- 
ture is  the  spreading  of  investments  of  capital  and  labor 
over  a  large  area.  Intensive  farming  is  the  rule  where 
land  is  expensive;  extensive  'agriculture  is  the  rule  where 
land  is  cheap.  In  the  truck-gardens  near  our  large  cities 
there  are  large  investments  in  fertilizers  and  labor;  every 
foot  of  the  soil  is  cultivated.  It  is  too  valuable  to  be  left 
idle.  In  the  wheat-fields  of  North  Dakota  there  is  small 
investment  of  capital  and  labor  to  the  acre.  No  one  com- 
plains if  a  person  walks  through  a  wheat-field,  and  the 
harvesters  do  not  bother  to  cut  every  corner  clean. 

Farming  in  the  United  States  is  done  chiefly  by  the 
men  who  own  the  farms.  Though  there  are  some  great 
farms  covering  thousands  of "  acres,  like  the  Dalrymple 
Farm  of  North  Dakota,  most  farms  are  less  than  1 50  acres 
in  size. 

The  most  serious  problem  of  the  American  farmer  has 
been  to  secure  labor.  This  is  because  farm  laborers  have 
been  attracted  to  the  city,  partly  by  the  belief  that  city 
life  is  more  enjoyable  and  partly  because  of  higher  wages. 
It  is  doubtful  whether  city  life  has  the  expected  advantages. 
The  farm  laborer  has  many  advantages  which  the  city  does 


INDUSTRIES   OF   THE   UNITED   STATES  135 

not  give  and  the  purchasing  power  of  a  small  money  wage 
in  the  country  may  be  as  large  as  that  of  the  higher  money 
wage  in  the  city.  No  business  demands  a  greater  exercise 
of' the  mental  powers  of  a  man  than  successful  farming. 

Farm  products  are  generally  sent  to  commission  agents 
who  sell  them  to  wholesale  or  retail  dealers.  Farmers 
sometimes  complain  that  commission  agents  do  not  deal 
fairly  with  them,  but  perhaps  the  farmers  do  not  under- 
stand the  problems  of  the  commission  merchants.  Direct 
dealing  between  farmers  and  consumers  of  farm  products 
may  be  maintained  through  the  parcel-post  or  by  city 
markets  to  which  the  farmer  may  bring  his  goods  and  sell 
them  direct  to  the  Consumer. 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1.  Have  you  ever  tried  to  domesticate  a  wild  animal?     With 

what  success?  What  were  the  causes  for  your  success  or 
failure  ? 

2.  What  are  the  chief  agricultural  products  of  your  state?     Have 

the  agricultural  products  of  your  state  changed  in  recent 
years?     Whence  comes  the  wheat  used  in  your  city? 

3.  Would  you  prefer  to  work  in  a  factory  or  on  a  farm?     Why? 

Have  you  had  any  experience  in  either  kind  of  work?  If 
so,  how  did  you  like  it  ? 

4.  Do  you  think  agricultural  products  cost  too  much  in  your 

city?  How  much  of  the  price  goes  to  the  farmer?  How 
much  to  the  commission  merchant?  How  much  to  the 
retailer  ? 

5.  A  Michigan  grower  of  peaches  sent  500  baskets  of  peaches  to 

Chicago.  The  farmer  received  one  dollar  a  bushel  for  his 
peaches,  but  thought  he  should  have  received  more  because 
the  best  peaches  were  selling  in  Chicago  at  two  dollars  a 


136  THE   ELEMENTS   OF   ECONOMICS 

basket  retail.  Show  that  his  complaint  may  not  have  been 
justified. 

6.  How  are  farm  products  marketed  in  your  city?     Show  how- 

marketing  of  farm  products  might  be  improved. 

7.  A  New  York  citizen  drove  his  automobile  to  Suffolk  County, 

Long  Island,  and  brought  home  a  load  of  peaches  for  which 
he  paid  $1.25  a  basket.  The  trip  consumed  a  whole  day 
and  cost  him  ten  gallons  of  gasoline  and  a  quart  of  oil,  to 
say  nothing  of  the  wear  and  tear  on  his  car.  He  found  that 
peaches  of  the  same  quality  were  selling  in  New  York  at 
$2.75  a  basket.  Did  he  save  anything  by  his  journey  if  he 
l)rought  home  ten  bushels?  Was  the  difference  in  price  on 
the  farm  and  at  the  retail  market  too  great?  What  were 
the  expenses  from  the  farm  to  the  city  purchaser? 


CHAPTER  XII 
MANUFACTURING 

The  Industrial  Revolution. — In  the  latter  part  of  the 
eighteenth  century,  a  series  of  epoch-making  inventions 
brbught  about  the  Industrial  Revolution. 

The  more  important  of  these  inventions  affected  the 
manufacture  of  cloth.  Cotton  goods  had  been  made  by 
the  weavers  in  their  homes.  The  yarns  were  carded  and 
spun  by  hand,  usually  by  the  wife  and  unmarried  daugh- 
ters. Spinning  was  so  much  the  ordinary  occupation  of 
an  unmarried  daughter  that  the  word  spinster  designated 
an  unmarried  daughter. 

The  story  goes  that  as  a  poor  weaver,  James  Hargreaves 
by  name,  entered  his  house  one  day,  his  wife  accidentally 
dropped  her  spindle.  The  spindle,  in  an  upright  position, 
continued  to  revolve  with  the  thread  still  spinning  in  the 
wife's  hand.  To  Hargreaves  the  idea  was  suggested  of 
connecting  a  number  of  spindles  with  one  wheel.  The 
machine  which  Hargreaves  completed  was  named  in  honor 
of  his  wife,  a  Spinning- Jenny.  The  spinning-jenny  soon 
came  into  general  use,  though  not  without  protest  from 
many  people  who  thought  that  by  its  use  they  would  be 
thrown  out  of  work. 

The  yarn  spun  by  the  jenny  was  not  suitable  to  be  used 
as  warp,  which  is  the  name  given  to  the  threads  which  run 
the  long  way  of  the  fabric.  Hence  woolen  and  linen 
threads  had  to  be  used.     Richard  Arkwright  in  1771  in- 

137 


138  THE  ELEMENTS  OF  ECONOMICS 

vented  a  process  of  passing  the  thread  over  two  pairs  of 
rollers,  one  revolving  much  faster  than  the  other.  His  in- 
vention received  the  name  of  water-frame,  from  the  fact 
that  the  mill  in  which  it  was  first  used  was  run  by  water- 
power.  In  the  years  from  1774-79  Samuel  Crompton 
produced  a  machine  which  combined  the  inventions  of 
Arkwright  and  Hargreaves.  This  machine  was  called  a 
mule,  because  of  "its  nature"  we  are  told. 

The  invention  of  the  steam-engine  by  James  Watt  in 
1769  gave  the  power  necessary  to  run  machinery  better 
than  the  water  and  horse  power  which  had  previously  been 
used.  These  inventions  first  were  applied  to  the  manu- 
facture of  cotton,  but  later  affected  all  textile  industries. 
The  use  of  machinery  in  the  textile  industries  was  followed 
by  its  introduction  in  other  lines  of  manufacture. 

The  Factory  System. — With  the  use  of  expensive  ma- 
chinery and  steam-power,  industries  were  transferred  from 
homes  and  from  small  shops  to  large  factories.  This 
brought  about  the  separation  between  laborers  and  capital- 
ists and  the  general  use  of  the  wages  system.  The  word 
"manufacturer"  in  Adam  Smith's  Wealth  of  Nations,  re- 
ferred to  a  man  who  made  things  with  his  hands  {manus 
and  facio),  or,  as  we  would  say,  a  laborer.  "Manufac- 
turer," after  the  industrial  revolution,  received  its  modern 
meaning.  The  immense  increase  in  production  of  goods 
brought  about  competition  in  a  larger  market.  There 
were  no  laws  regulating  hours  or  conditions  of  labor,  as 
the  current  thought  and  practice  favored  a  laissez-faire, 
or  let-alone  poHcy.  According  to  this  theory  everything, 
if  let  alone,  would  adjust  itself  properly.  If  one  employer 
of  labor  was  unfair,  it  was  supposed  that  laborers  would 


MANUFACTURING  139 

desert  him.  Hence  he  would  discover  that  unfairness  did 
not  pay.  If  a  man  cheated,  his  deception  would  be  found 
out  and  he  would  be  shunned  by  other  men. 

Slowly  England  learned  the  fallacy  of  a  laissez-faire 
policy  and  successive  acts  were  passed  to  protect  labor 
against  excessive  hours,  unsanitary  conditions,  accidents, 
and  other  defects  of  the  factory  system. 

The  Extension  of  the  Factory  System  to  America. — 
Parliament  desiring  to  secure  for  England  the  benefit  of 
the  great  inventions  prohibited  the  export  of  any  ma- 
chinery, tools,  plans,  or  models  under  severe  penalties. 
Americans  were  able,  however,  to  introduce  the  spinning- 
jenny  into  this  country  in  1775. 

The  first  complete  cotton  factory  was  operated  in  1789 
by  Samuel  Slater  at  Pawtucket,  Rhode  Island.  Although 
Slater,  called  by  Jackson  *'the  father  of  American  manu- 
facturers,",could  not  import  any  machinery  or  plans  from 
England,  he  was  able  to  reproduce  from  memory  the  most 
important  machinery.  The  War  of  181 2  helped  manufac- 
turing in  the  United  States,  as  the  people  had  to  make  the 
things  they  wanted  or  go  without  them.  After  the  war 
was  over,  manufacturing  lagged  in  the  United  States  and 
the  factory  system  was  not  fully  established  until  1840. 
Albert  Gallatin  attributed  the  slow  growth  of  manufac- 
tures in  the  United  States  to  (i)  the  greater  profit  to  be 
obtained  from  agriculture,  (2)  the  abundance  of  land, 
(3)  the  scarcity  of  capital,  (4)  the  high  price  of  labor. 

The  Factory  System  Still  Being  Extended. — The  sub- 
stitution of  factory-made  goods  for  those  of  home  pro- 
duction has  continued  to  the  present  time.  Not  long 
ago  canned  fruits  and  vegetables  were  prepared  at  home; 


I40  THE   ELEMENTS   OF   ECONOMICS 

now  they  are  chiefly  factory  products.  The  same  may 
be  said  of  bread,  cakes,  and  pies.  Clothing  for  men  and 
women  is  now  chiefly  factory  made,  but  men  who  are  still 
young  can  remember  when  these  articles  were  the  products 
of  home  labor. 

Tendency  toward  Production  on  a  Large  Scale. — There 
are  several  reasons  to-day  for  large,  factories.  Industries 
such  as  the  making  of  pianos,  automobiles,  watches,  and 
shoes,  the  slaughtering  of  animals  for  food,  and  the  pack- 
ing of  meat,  show  a  tendency  for  the  large  factories  to 
become  larger  and  the  small  factories  to  disappear.  This 
does  not  necessarily  mean  monopoly,  as  the  large  factories 
still  compete  with  one  another.  Some  of  the  advantages 
of  production  on  a  large  scale  are  the  following: 

1.  Greater  economy  in  the  use  of  capital.  Machinery 
in  a  large  factory  m?y  be  kept  busy  all  the  time,  while  in 
a  small  factory  the  output  is  not  large  enough  fully  to 
employ  the  specialized  machinery  all  the  time. 

2.  There  may  be  a  greater  division  of  labor,  particularly 
among  the  more  specialized  lines  of  labor.  A  large  plant 
can  hire  a  skilful  chemist,  engineer,  or  superintendent. 

3.  There  can  be  economy  in  the  purchase  of  raw  ma- 
terials in  large  quantities  and  at  regular  intervals. 

4.  In  the  making  of  by-products  a  large  factory  can 
use  much  of  what  a  small  factory  would  waste.  The 
great  packing-houses  produce  many  by-products  such  as 
fertilizers,  glue,  ammonia,  leather,  and  pepsin. 

5.  A  large  establishment  may  secure  its  source  of  raw 
material,  may  have  its  own  steamships  and  wharfs,  may 
make  its  own  barrels  or  other  containers,  and  have  its  own 
storage  plants. 


MANUFACTURING  141 

Advantages  of  the  Small  Producer. — However,  the  ad- 
vantages are  not  all  with  the  large  producer.  The  follow- 
ing are  some  of  the  advantages  of  the  producer  on  a  small 
scale : 

1.  The  proprietor  who  manages  his  own  establishment 
has  an  inducement  to  economy  and  hard  work,  which  the 
hired  manager  does  not  have.  Against  competition  of 
powerful  establishments,  many  small  plants  operated  by 
their  proprietors  flourish. 

2.  In  some  industries  the  greatest  efficiency  of  plant 
may  be  obtained  in  a  small  factory.  Any  further  increase 
in  size  is  mere  duplication. 

3.  Electric  power  may  be  had  by  the  small  producer. 
This  tends  to  overcome  the  advantage  of  generating  power 
on  a  large  scale  by  the  larger  plant. 

4.  Waste  materials  may  be  sold  to  those  who  specialize 
in  their  use,  thus  overcoming  the  advantage  which  the 
large  producer  has  in  making  by-products. 

Machinery  and  Labor. — On  looking  at  a  piece  of  ma- 
chinery which  will  enable  one  man  to  do  the  work  formerly 
done  by  ten  men,  the  observer  may  jump  at  the  conclusion 
that  nine  men  have  lost  their  jobs.  This  is  far  from  the 
truth.  The  immediate  effect  of  labor-saving  machinery  is 
to  replace  labor  by  machinery,  but  the  ultimate  effect  upon 
labor  is  different.  The  lowering  of  the  cost  of  production 
results  in  lower  prices  and  an  increased  demand,  which  is 
generally  followed  by  a  larger  number  of  men  being  em- 
ployed in  the  industry,  not  to  speak  of  the  men  employed 
in  making  the  machines.  For  example:  The  introduction 
of  type-setting  machines  was  resisted  by  the  men  employed 
in  the  printing  trade.     At  first  a  large  number  of  men  were 


142  IHE   ELEMENTS   OF   ECONOMICS 

thrown  out  of  employment,  but  newspapers  and  books 
were  so  reduced  in  price  that  an  increased  demand  led  to 
an  increased  amount  of  work.  Now  many  thousands  of 
men  are  employed  in  the  printing  trades  whose  labor 
would  not  be  in  demand  were  it  not  for  the  type-setting 
machines.  Likewise,  the  locomotive  displaced  the  stage- 
driver,  but  the  railroads  have  vastly  increased  the  demand 
for  transportation  and  have  therefore  increased  the  de- 
mand for  labor. 

The  fallacy  which  has  just  been  explained  is  sometimes 
called  the  "lump  of  labor  fallacy."  It  assumes  that  there 
is,  at  any  time,  a  certain  amount  of  work  to  be  done  and 
that,  if  labor-saving  machinery  is  introduced,  a  certain 
number  of  laborers  will  lose  their  jobs.  The  fact  is  that 
there  is  an  indefinite  amount  of  work  to  be  done  and 
whether  or  not  the  work  is  done  depends  upon  cost  and 
demand  for  the  product. 

Without  doubt  the  conditions  of  labor  have  improved 
through  labor-saving  devices.  An  engineer,  operating  a 
locomotive,  has  an  employment  more  remunerative  and 
more  pleasant  than  the  stage-driver  and  one  that  employs 
his  intellect  to  a  larger  degree.  The  man  who  operates  a 
lathe,  or  almost  any  other  machine,  has  a  better  job  than 
the  hand  laborer  who  formerly  worked  in  a  similar  industry. 

The  Law  of  Diminishing  Returns  in  Mantifacturing. — 
We  have  previously  explained  the  law  of  diminishing  re- 
turns in  agriculture.  It  was  once  thought  that  the  law  of 
diminishing  returns  did  not  apply  to  manufacturing.  This 
is  a  mistake.  It  must  not  be  forgotten  that  the  law  of 
diminishing  returns  does  not  refer  to  industry  as  a  whole 
hut  on  a  given  area  of  land.     The  amount  of  labor  and 


144  .  THE   ELEMENTS   OF   ECONOMICS 

capital  which  may  be  employed  on  an  acre  of  land  in 
manufacturing  is  very  great  as  compared  with  that  which 
can  be  employed  in  agriculture  and  the  point  of  diminish- 
ing returns  is,  therefore,  reached  more  slowly  in  manufac- 
turing. But  the  point  of  diminishing  returns  comes  in 
manufacturing.  It  does  not  pay  to  build  factories  be- 
yond a  certain  height  nor  to  crowd  them  with  machinery 
beyond  a  certain  degree.  When  the  maximum  employ- 
ment of  capital  and  labor  consistent  with  economy  of 
production  has  been  reached  on  a  given  area  of  land,  it 
becomes  desirable  and  necessary  to  buy  new  land  and 
put  up  new  buildings,  rather  than  enlarge  old  buildings  or 
crowd  them  more. 

In  mining  the  expense  increases  rapidly  with  the  in- 
creased depth  of  the  mine.  The  higher  an  elevator  is  run, 
the  more  rapidly  the  expense  of  instalment  and  operation 
increases.  The  last  knot  that  is  obtained  from  a  fast 
steamboat  costs  more  than  any  other  knot.  The  law  of 
diminishing  returns  has  a  universal  application,  but  the 
point  of  diminishing  returns  is  reached  sooner  in  some  in- 
dustries than  in  others. 

Summary. — The  industrial  revolution  gave  rise  to  the 
factory  system.  The  policy  of  laissez-faire,  or  non-inter- 
ference, was  at  first  followed  in  England,  but  was  aban- 
doned in  the  first  half  of  the  nineteenth  century.  The 
factory  system  was  introduced  into  America  before  the 
close  of  the  eighteenth  century,  but  was  not  fully  estab- 
lished until  about  1840.  The  substitution  of  factory-made 
goods  for  goods  of  home  production  has  not  ceased.  There 
are  several  reasons  why  to-day  there  are  large  factories. 
Among  these  are:  (i)  Greater  economy  in  the  use  of  capi- 
tal, (2)  a  greater  division  of  labor,  (3)  economy  in  the 


MANUFACTURING  145 

making  of  by-products,  (4)  the  large  factory  may  control 
the  source  of  its  raw  material  and  other  supplies.  How- 
ever, the  advantages  are  not  all  in  favor  of  the  large  pro- 
ducers. A  small  factory  may  have  the  following  advan- 
tages: (i)  Personal  interest  of  the  proprietor,  (2)  in  many 
industries  as  great  an  efficiency  of  plant  as  the  large  pro- 
ducer, (3)  electric  power  tends  to  aid  the  small  producer, 
(4)  waste  material  may  be  sold  to  those  who  specialize  in 
its  use.  Machinery  has  been  a  benefit  to  laborers  and  to 
the  whole  population.  The  law  of  diminishing  returns 
applies  to  manufacturing,  but  a  much  larger  investment 
on  a  given  area  of  land  may  be  made  than  in  agriculture. 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1.  Show  the  immediate  effects  of  the  industrial  revolution  in 

England.  References:  Beard,  The  Industrial  Revolution; 
Toynbee,  The  Industrial  Revolution;  Ely,  Outlines  of  Eco- 
nomics, pp.  51-56;  Shapiro,  Modern  and  Contemporary  Eu- 
rope, pp.  49-52. 

2.  Give  an  account  of  the  rise  of  the  factory  system  in  America. 

References:  Coman,  Industrial  History  of  the  United  States, 
pp.  180-193;  Bogart,  Economic  History  of  the  United  States, 
chap.  XI;  Taussig,  Tariff  History  of  the  United  States, 
pp.  17-67. 

3.  What  factory-made  articles  used  in  your  own  home  were  home- 

made a  few  years  ago?  What  electric  appliances  are  now 
used  in  homes? 

4.  What  small  factories  are  there  in  your  community  ?     How  long 

have  they  been  in  existence?  What  advantages  do  they 
possess  ? 

5.  Visit  some  factory  and  make  a  report  on  use  of  machinery  in 

the  factory. 


CHAPTER  XIII 
TRANSPORTATION 

In  the  United  States  we  have  seen  three  stages  in  the 
development  of  transportation:  (i)  The  turnpike;  (2) 
canal  and  river;  (3)  railroad. 

The  Turnpike  Period. — In  colonial  times  roads  were  few 
and  local.  The  first  long-distance  roads  were  constructed 
during  the  last  decade  of  the  eighteenth  century.  These 
long-distance  roads  were  built  by  private  companies,  usu- 
ally aided  by  public  funds,  and  tolls  were  charged  for  their 
use.  They  were  called  turnpikes,  from  the  bar  that  closed 
the  road  and  was  turned  to  let  a  wagon  pass  after  the  toll 
had  been  paid.  The  cost  of  transportation  by  turnpike 
was  very  high.  It  cost  about  t^t,  per  ce^t  of  the  value  to 
send  goods  from  Philadelphia  to  Kentucky.  The  average 
expense  for  transportation  of  goods  by  turnpike  was  ten 
dollars  a  ton  for  every  100  miles.  In  his  famous  report  of 
1807,  Gallatin  recommended  that  the  Federal  Government 
build  roads  and  canals.  Considerable  money  was  thus 
expended  by  the  government,  notwithstanding  objections 
raised  to  this  use  of  Federal  funds  on  account  of  its  alleged 
unconstitutionaHty.  State  governments  also  aided  in  road 
construction  and  the  principal  cities  of  the  United  States 
were  connected  by  roads  as  early  as  1840. 

The  Revival  of  Long-Distance  Roads. — After  railroads 
were  built,  wagon-roads  were  used  only  for  short-distance 
hauls  and  state  and  national  aid  ceased.    To-day  there  is 

146 


From  a  photograph  by  Ewing  GaUoway 

MITCHELL  POINT  ON  THE  COLUMBIA  RIVER  HIGHWAY 

The  Columbia  River  Highway  here  runs  under  a  sheer  cliff.     A  fine  example 
of  a  modern  long-distance  road 


143  -  THE   ELEMENTS   OF   ECONOMICS 

a  new  interest  in  long-distance  roads  on  account  of  the 
automobile.  All  the  states  and  the  Federal  authorities 
are  now  giving  attention  to  road-building.  Good  roads 
bring  pleasure  to  thousands  and  result  in  better  prices  for 
the  farmers  and  lower  prices  and  better  service  for  city 
consumers  of  farm  products. 

Canal-Building. — While  the  building  of  turnpikes  was 
under  way,  another  method  of  transportation  was  receiving 
attention.  Canals  cost  more  to  build,  but  when  once 
built  goods  can  be  sent  by  canal  much  cheaper  than  by 
road.  A  mule  can  draw  more  goods  loaded  in  a  canal-boat 
than  twenty  horses  can  haul  in  a  wagon.  The  people  of 
the  United  States  knew  the  advantages  of  canals  over 
roads  and  gave  their  attention  to  the  construction  of 
canals  as  soon  as  their  resources  permitted.  Though  sev- 
eral canals  had  been  constructed  before  the  Erie  Canal, 
this  was  the  first  great  success  in  canal-building.  It  con- 
nected the  Hudson  River  with  Lake  Erie  and  was  com- 
pleted in  1825.  Its  success  was  immediate.  Freight  rates 
were  lowered,  time  of  transit  was  shortened,  and  new  dis- 
tricts were  opened  to  trade.  In  addition  to  this  it  was 
profitable  to  its  builder,  the  State  of  New  York,  and  paid 
for  itself  in  ten  years.  The  Erie  Canal  continued  to  pro- 
duce a  revenue  for  the  State  of  New  York  until  the  com- 
petition of  railroads  took  away  most  of  its  patronage.  It 
is  still  in  operation,  having  recently  been  converted  into  a 
barge  canal.  Though  the  Erie  Canal  now  produces  no 
revenue  it  still  has  an  influence  in  keeping  down  the  cost 
of  transportation  in  New  York  State,  and  would  prove 
invaluable  if  for  any  cause  transportation  by  rail  were 
interrupted. 


TRANSPORTATION  149 

Other  states  followed  New  York.  Pennsylvania  com- 
pleted an  extensive  canal  system  in  1834.  The  Ohio 
Canal,  built  by  the  State  of  Ohio,  connected  Lake  Erie 
and  the  Ohio  River.  Massachusetts,  New  Jersey,  and 
Virginia  were  among  the  states  that  led  in  canal-building. 
The  states  built  canals  directly  by  appropriating  money 
and  loaned  their  credit  to  private  canal  companies. 

The  immediate  result  was  favorable  to  all  sections  of 
the  country.  The  farmers  in  the  West  were  able  to  send 
their  goods  to  Eastern  markets  and  receive  better  prices 
than  had  prevailed  in  their  local  markets.  They  also  pur- 
chased farm  machinery  for  less  than  they  had  formerly 
paid.  The  cities  of  the  Eastern  states  also  profited  by 
lower  prices  for  flour  and  an  enlarged  market  for  their 
manufactured  goods. 

Most  of  the  canals  were  not  successful  financially,  owing 
to  the  competition  of  railroads.  When  the  railroads  made 
the  canals  unprofitable  most  canals  were  sold  to  railroad 
companies  or  abandoned. 

Railroads. — Railroads  have  become  the  chief  means  of 
transporting  goods  over  long  distances  in  the  United 
States.  No  country  in  the  world  has  so  many  miles  of 
railroads  as  America.  It  is  difficult  to  believe  that  the 
grandfathers  of  many  men  still  active  in  business  never 
saw  a  railroad. 

The  Baltimore  and  Ohio  Railroad,  the  pioneer  in  Amer- 
ica, opened  a  few  miles  of  road  in  1830.  Horse-power  and 
sails  were  tried  as  motive  power,  but  after  a  year  and  a 
half  of  experience  with  these,  steam-power  was  adopted. 
The  first  locomotives  were  imported  from  England,  but 
proved   unsuited   to  American   rails  and  road-beds,   and 


ISO  THE   ELEMENTS   OF   ECONOMICS 

American  engineers  soon  designed  engines  better  suited  to 
American  conditions. 

Railroad-building  proceeded  rapidly  after  1840.  Soon 
every  Eastern  city  of  much  importance  had  railroad  con- 
nection with  other  cities,  and  by  1850  railroads  had  pene- 
trated west  of  the  Allegheny  Mountains.  The  railroads  in 
1850  were  local  roads.  Frequent  changes  of  cars  were 
necessary  in  order  to  travel  long  distances. 

The  decade  from  1850  to  i860  was  characterized  by 
great  activity  in  railroad-building.  By  the  end  of  this 
decade  there  were  28,919  miles  of  railroad  in  operation. 
Local  lines  were  beginning  to  be  Hnked  together.  For 
example,  several  local  lines  between  Albany  and  Buffalo 
were  united  to  form  the  New  York  Central  Railroad.  This 
resulted  in  greater  economy  of  operation  and  greater  con- 
venience to  travellers. 

The  Civil  War  brought  a  stop  to  railroad  construction. 
After  the  war  railroad  construction  was  revived  and  soon 
the  states  east  of  the  Mississippi  had  a  network  of  rail- 
roads connecting  all  important  cities.  Railroads  to  the 
Pacific  coast  were  planned  while  the  Civil  War  was  being 
waged.  No  private  company  was  willing  to  begin  the 
work  without  government  aid  and  Congress  voted  to  give 
large  grants  of  land  and  to  loan  millions  of  dollars.  The 
Union  Pacific  Railroad,  extending  from  Omaha  to  Ogden, 
was  granted  12,000,000  acres  of  public  land.  The  Central 
Pacific,  reaching  from  Ogden  to  Sacramento,  received 
8,000,000  acres.  Grants  to  other  railroads  brought  the 
total  land  grants  by  the  Federal  Government  to  159,000,- 
000  acres  before  land  grants  were  discontinued  in  1871. 

On  May  10,  1869,  the  Union  Pacific  and  the  Central 


152  THE   ELEMENTS   OF  ECONOMICS 

Pacific  Railroads  were  joined  at  Promontory  Point  near 
Ogden.  It  now  was  possible  to  travel  by  rail  from  New 
York  to  California. 

Railroad  Competition. — Soon  after  the  Civil  War  most 
of  the  short  railroads  were  linked  together.  Competition 
became  intense  between  rival  lines.  The  theory  of  the 
time  was  that  competition  should  be  encouraged.  *Xut- 
throat  competition"  led  to  the  weaker  lines  being  forced 
to  sell  out  to  the  stronger.  The  New  York  Legislature, 
like  legislative  bodies  in  other  states,  tried  to  prevent 
consolidation  of  rival  lines  by  passing  a  law  making  such 
an  act  illegal.  When  the  West  Shore  Railroad  was  beaten 
in  a  war  of  rates  by  the  New  York  Central,  it  was  leased 
to  the  latter  railroad  for  a  period  of  999  years. 

Where  consolidation  was  not  feasible  ''pooling"  agree- 
ments were  made.  Under  their  terms  business  and  profits 
were  divided  and  the  same  rates  charged  by  each  line. 
Competition  in  rates  ceased. 

Railroad  Abuses. — Under  unrestricted  private  ownership 
a  number  of  abuses  developed.  The  most  serious  was  dis- 
crimination in  regard  to  persons  and  places.  Favored 
shippers  were  given  special  advantages  in  assignment  of 
cars  and  special  rates.  The  regular  rate  was  usually  col- 
lected from  a  favored  shipper  and  then  a  part  returned 
to  him.  This  was  called  a  rebate.  Passes  were  freely 
granted  to  favored  persons  and  denied  to  others.  Dis- 
crimination against  places  was  no  less  common.  The 
granting  of  lower  rates  to  some  places  than  were  given  to 
others  was  a  great  advantage  to  the  favored  communities. 

Public  Regulation  of  Railroads. — In  1887  was  passed  the 
Interstate  Commerce  Act.     Its  object  was  to  compel  the 


TRANSPORTATION  1 53 

railroads  to  treat  all  alike.  All  discrimination  was  pro- 
hibited. The  Interstate  Commerce  Commission,  created 
by  the  act,  has  had  its  power  increased  by  supplementary 
legislation  and  now  has  fairly  complete  control  over  the 
railroads. 

Most  of  the  states  have  commissions  of  their  own  with 
control  over  commerce  within  the  state.  '  Sometimes  the 
state  commissions  have  acted  contrary  to  sound  economic 
poUcy  and  have  hindered  rather  than  helped  the  railroads. 

Mr.  Alfred  P.  Thorn,  in  an  address*  before  the  State  Bar 
Association  of  Tennessee,  showed  some  of  the  faults  of  the 
state  commissions: 

"Three  states  have  passed  laws  making  it  illegal  for  a 
carrier  having  repair  shops  in  the  state  to  send  any  of  its 
equipment,  which  it  is  possible  to  repair  there,  out  of  the 
state  for  repairs  in  another  state;  fifteen  states  have 
attempted  to  secure  preferred  treatment  of  their  state 
traffic,  either  by  heavy  penalties  for  delays  or  by  prescrib- 
ing a  minimum  movement  of  fifty  miles  per  day — one  of 
these  States  imposing  a  fine  of  ten  dollars  per  hour  for  the 
forbidden  delay;  twenty  states  have  hours-of-service  laws, 
varying  from  ten  to  sixteen  hours;  twenty  states  have  full- 
crew  laws;  twenty-eight  states  have  headlight  laws,  with 
varying  requirements  as  to  the  character  of  the  lights, 
and  fourteen  states  have  safety-appliance  acts.  Sixteen 
states  have  enacted  statutes,  each  asserting  for  itself  the 
individual  right  to  control  the  issue  of  stocks  and  bonds 
of  interstate  carriers. 

"It  is  manifest  that  if  such  issue  is  to  be  regulated  by 
the  individual  state,  every  state  is  at  the  mercy  of  the 

*  Quoted  by  Kahn,  Business  and  Economics,  p.  81. 


154  THE   ELEMENTS   OF   ECONOMICS 

Others.  A  bond  to  be  available  in  the  market,  must,  as  a 
rule,  be  secured  upon  the  whole  railroad  hne;  and  this 
crosses  many  states.  One  of  the  states,  therefore,  if  it 
possesses  the  power  to  regulate  the  issue  of  securities  of  an 
interstate  carrier,  may  defeat  a  financial  plan  approved  by 
all  the  other  states,  and  necessary  to  the  carrier's  trans- 
portation efficiency." 

It  would  seem  to  be  clear  that  railroads  doing  an  inter- 
state business  should  be  left  to  the  jurisdiction  of  the 
Interstate  Commerce  Commission. 

The  Railroads  and  the  Great  War. — The  war  brought  a 
great  demand  for  railroad  transportation.  There  were 
millions  of  soldiers  to  be  transporte,d  and  millions  of  tons 
of  supplies  to  be  taken  to  the  ports  of  embarkation.  The 
task  was  a  heavy  one  for  the  railroads  and  the  United 
States  Government  assumed  control.  Mr.  McAdoo  was 
made  director-general  of  railroads.  He  treated  the  rail- 
roads of  the  country  as  a  unit,  and  important  savings  and 
increased  efficiency  were  secured.  Unnecessary  passenger 
trains  were  eliminated,  and  rates  for  passengers  and  freight 
were  raised.  It  became  necessary  to  increase  the  pay  of 
railroad  employees  and  this  was  done.  Government  opera- 
tion was  successful  inasmuch  as  the  required  service  was 
rendered,  but  it  was  not  a  financial  success.  The  condi- 
tions were  exceptional  and  probably  private  ownership 
would  have  been  at  least  as  unremunerative.  The  rail- 
roads were  restored  to  their  owners  in  September,  1920, 
with  certain  temporary  government  guarantees. 

Water  Transportation. — American  shipping  was  impor- 
tant in  colonial  times.  Successful  shipyards  were  operated 
in  all  the  colonies  before  the  Revolutionary  War.     The 


A  MODERN  OCEAN  LINER,  THE  IMPERATOR 


Courtesy  of  the  New  York  Central  Lines  Magazine 
THE  TWENTIETH  CENTURY  LIMITED,  ON  THE  NEW  YORK 
CENTRAL  RAILROAD 


156  THE   ELEMENTS   OF   ECONOMICS 

prevalence  of  war  in  Europe  during  the  closing  years  of 
the  eighteenth  century  and  the  opening  years  of  the  nine- 
teenth century  aided  the  American  merchant  marine.  Not 
only  did  our  merchant  ships  carry  goods  for  Americans, 
but  about  one-half  of  the  exports  of  the  United  States  in 
1 80 1  was  composed  of  foreign  goods  which  were  brought 
to  the  United  States  from  South  America  and  the  West 
Indies  for  shipment  to  Europe.  Shipments  direct  from 
South  America  to  Europe  were  subject  to  capture,  but  the 
danger  from  British  ships-of-war  was  averted  by  landing 
the  goods  in  American  ports  and  then  reshipping  them. 
Professor  H.'  C.  Adams  says:  ''The  growth  of  American 
shipping  from  1789  to  1807  is  without  parallel  in  the  his- 
tory of  the  commercial  world." 

The  American  merchant  marine  suffered  seriously  as  a 
result  of  the  English  Orders  in  Council  of  1804  a-nd  1807 
which  declared  all  ports  in  France  or  of  her  colonies  and 
allies  closed  to  neutral  vessels  unless  they  first  entered  a 
British  port  and  paid  duties  to  Great  Britain.  Napoleon 
responded  by  his  Milan  decree  which  declared  that  any 
ship  obeying  the  English  Orders  in  Council  was  subject 
to  capture.  The  War  of  181 2  and  the  restoration  of 
peace  in  Europe  resulted  in  the  loss  of  most  of  our  carrying 
trade. 

In  1840  the  carrying  trade  of  the  United  States  began 
to  revive.  This  was  the  day  of  the  American  clippers, 
which  surpassed  all  ships  of  their  time.  In  building 
wooden  ships  we  had  an  advantage  both  in  material  and  in 
skill  of  ship-builders.  These  clipper  ships,  so-called  be- 
cause of  their  sharp,  overhanging  prow,  were  especially 
designed  for  the  trade  with  China.     They  went,  however, 


TRANSPORTATION  157 

to  every  port.  By  the  time  of  the  Civil  War,  our  shipping 
trade  was  about  equal  to  that  of  England. 

During  the  Civil  War  American  shipping  declined  be- 
cause of  the  ravages  of  Confederate  cruisers.  However,  it 
is  probable  that  our  shipping  would  have  declined  if  there 
had  been  no  war.  Changes  were  taking  place  which  made 
our  ships  unable  to  compete  with  the  ships  of  England. 

These  changes  were  the  substitution  of  iron  ships  for 
wooden  ships  and  of  steam  for  sails.  England  led  in  the 
substitution,  but  America  confidently  clung  to  the  old 
style.  America  saw  her  mistake  too  late.  Our  carrying 
trade  was  practically  lost.  In  1914  less  than  10  per  cent 
of  our  foreign  trade  was  carried  in  American  ships. 

Shortly  after  the  United  States  was  forced  to  enter  the 
World  War  by  the  hostile  acts  of  Germany,  it  became 
evident  that  the  war  would  be  lost  unless  more  ships  were 
built  to  carry  supplies  to  England  and  France,  or  unless 
the  unlawful  submarine  policy  of  Germany  could  be  de- 
feated by  destroying  the  submarines.  The  United  States, 
in  co-operation  with  our  allies,  was  successful  in  both 
endeavors.  By  Act  of  Congress  a  Shipping  Board  was 
created  with  almost  limitless  resources.  During  the  first 
year  of  its  operations — ^August,  191 7,  to  August,  1918 — 574 
ships  were  launched,  with  a  tonnage  of  3,017,238.  The 
activities  of  the  Shipping  Board  were  just  reaching  their 
height  when  the  armistice  was  declared.  The  production 
of  ships  from  September,  1919,  to  February,  1920,  was  at 
the  rate  of  4,250,000  tons  a  year.  In  June,  1920,  the 
United  States  had  a  sea-going  merchant  marine  of  12,406,- 
123  tons,  compared  with  18,110,652  of  England,  exclusive 
of  her  colonies  and  dependencies. 


158  THE   ELEMENTS   OF   ECONOMICS 

The  Merchant  Marine  Act  of  1920. — Under  the  terms  of 
the  act  of  1920,  the  ships  built  or  building  by  the  United 
States  Shipping  Board  were  transferred  to  a  new  shipping 
board.  This  Shipping  Board  is  composed  of  seven  com- 
missioners appointed  by  the  President  with  the  consent  of 
the  Senate.  The  Shipping  Board  is  authorized  to  sell  all 
vessels  which  it  does  not  want.  Americans  have  the  first 
option  of  purchase.  The  board  may  lay  out  ship  routes 
and  operate  them,  or  it  may  sell  or  charter  ships  to  Amer- 
ican citizens  for  operation  on  these  routes.  The  sum  of 
$25,000,000  a  year  for  five  years  may  be  used  by  the 
board,  out  of  its  revenues,  as  loans  to  American  builders  of 
steam  vessels.  These  loans  shall  not  exceed  more  than 
two-thirds  the  cost  of  the  ships  and  shall  be  secured  by 
liens  on  the  ships. 

Trade  on  the  Great  Lakes. — The  navigation  laws  of  the 
United  States  restrict  the  coastwise  trade  of  the  United 
States,  the  trade  on  American  rivers,  ,and  upon  the  Great 
Lakes  to  American  ships.  The  trade  on  the  Great  Lakes 
is  of  much  importance.  Grain,  iron  ore,  and  copper  ore 
are  the  principal  goods  that  are  shipped  East  via  the  Great 
Lakes.  Coal  and  heavy  machinery  and  manufactured 
goods  make  up  the  bulk  of  west-bound  shipments. 

Summary. — In  this  chapter  we  have  followed  the  de- 
velopment of  transportation  from  colonial  times  to  the 
present.  The  great  obstacles  to  inland  transportation 
were  the  dense  forests  and  the  numerous  rivers.  It  was 
much  easier  to  go  from  New  York  to  Boston  by  sea  than 
to  go  by  land.  In  the  days  of  sailing  ships  an  ocean  voyage 
was  always  uncertain  and  at  times  dangerous.  Roads 
were  much  desired  and  were  built  by  private  companies  as 


TRANSPORTATION  159 

soon  as  it  was  thought  they  would  pay.  Both  Federal  and 
state  governments  aided  in  road  construction  and  the 
principal  cities  of  the  United  States  were  connected  by 
roads  as  early  as  1840. 

With  the  advent  of  railroads  interest  in  long-distance 
wagon-roads  declined,  but  has  been  revived  in  our  own 
days  by  the  coming  of  the  automobile.  Gradually  toll 
roads  were  abolished  by  the  states  assuming  ownership 
and  now  toll  roads  are  very  few. 

The  canal  came  into  prominence  early  in  the  nineteenth 
century.  Though  canals  are  more  expensive  to  build  than 
roads,  the  cost  of  hauHng  a  ton  per  mile  on  a  canal  is  much 
less  than  by  road.  The  building  of  canals  was,  in  turn, 
halted  by  a  better  system  of  long-distance  transportation. 

Railroad-building  commenced  in  the  third  decade  of  the 
last  century,  but  did  not  reach  large  proportions  until  after 
1840.  From  1840  to  the  opening  of  the  Civil  War  railroad 
construction  was  pushed  with  energy  in  the  states  east  of 
the  Mississippi  River.  The  first  lines  were  short  ones,  but 
before  the  end  of  this  period  local  hnes  were  being  consoli- 
dated into  through  lines.  After  the  Civil  War,  the  trans- 
continental lines  were  constructed,  the  Federal  Government 
helping  with  land  grants  and  with  loans. 

Private  ownership  and  operation  of  railroads  was  un- 
restricted until  the  passage  of  the  Interstate  Commerce 
Act  in  1887.  This  act,  as  amended  from  time  to  time,  is 
designed  to  compel  the  railroads  to  deal  fairly  with  all 
their  patrons. 

The  foreign  commerce  of  the  United  States  was  carried 
in  American  ships  until  1807.  The  American  carrying 
trade  suffered  by  the  EngHsh  Orders  in  Council,  Napo- 


i6o  THE   ELEMENTS   OF   ECONOMICS 

Icon's  Milan  decree,  and  the  War  of  1812.  In  1840  it  was 
revived  again  to  decline  during  the  Civil  War.  The  Ship- 
ping Board  built  a  vast  merchant  fleet  during  the  World 
War  and  the  American  Merchant  Marine  Act  of  1920  seeks 
to  keep  our  merchant  marine  on  the  sea. 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1.  What  long-distance  roads  pass  through  your  city?     Where  do 

they  go? 

2.  What  canals  are  in  your  state?     Have  any  canals  in  your 

state  been  abandoned?    Why? 

3.  What  are  the  principal  railroads  of  your  state  ?    What  are  the 

principal  goods  they  ship  into  your  city?  What  do  they 
take  out  of  your  city?  What  competition  do  the  railroads 
of  your  city  have  to  face? 

4.  Are  there  any  automobile  trucking  companies  which  operate 

long-distance  routes  from  your  city?  Where  do  they  go? 
How  do  rates  compare  with  the  railroad  rates?  Would  you 
prefer  to  ship  household  furniture  by  railroad  or  automobile 
from  Indianapolis  to  Cleveland  if  the  rates  were  the  same? 
if  it  cost  25  per  cent  more  to  ship  by  an  automobile  truck? 
Why? 

5.  Do  you  think  the  Merchant  Marine  Act  of  1920  was  a  measure 

in  the  interest  of  all  Americans?  Give  reasons  for  your 
opinion. 

6.  Should  subsidies  be  given  to  American  ships  in  order  to  enable 

them  to  compete  with  English  and  German  ships?  Why 
can't  they  compete  without  subsidies?  What  advantages 
come  to  America  through  a  large  merchant  marine? 


CHAPTER  XIV 
MERCHANDISING 

Trade  Produces  Utility. — The  ancient  Greeks  and  Ro- 
mans did  not  look  with  favor  upon  trade.  To  build  up  a 
fortune  by  trade  implied  to  them  that  cheating  had  been 
practised.  Both  parties  to  a  trade  may  and  ordinarily  do 
profit.  A  man  who  has  more  automobiles  than  he  needs 
may  exchange  one  of  them  for  a  piece  of  land  upon  which 
to  build  a  summer  cottage,  with  a  man  who  has  a  large 
amount  of  land  and  wants  an  automobile.  Both  parties 
to  the  transaction  benefit.  It  makes  no  difference  whether 
the  transfer  is  made  directly  by  barter  or  indirectly  through 
the  use  of  money  and  a  middleman.  It  is  clear  that  an 
article,  in  the  possession  of  one  who  can  use  it,  is  worth 
more  than  in  the  possession  of  one  who  cannot  use  it. 
Therefore  exchange  creates  a  variety  of  utiUty  which  we 
may  call  "possession  utility." 

The  advantages  of  trade  are  well  illustrated  by  an  ex- 
perience of  General  Grant  when  he  was  President  of  the 
United  States.  Grant  had  purchased  a  horse  from  a 
butcher  for  the  sum  of  $250.  He  was  pleased  with  his 
bargain  and,  showing  the  horse  to  a  senator,  boasted  that 
it  had  cost  him  only  $250.  The  senator  was  not  impressed 
with  the  bargain  and  remarked:  ''Well,  I  think  I  would 
rather  have  the  $250  than  the  horse."  The  President 
replied:    ''That  is  just  what  the  butcher  thought."  , 

161 


i62  THE   ELEMENTS   OF  ECONOMICS 

Each  party  to  the  transfer  was  pleased.  The  President 
preferred  the  horse;  the  butcher  preferred  the  $250.  Every 
exchange,  unless  deception  is  employed,  may  be  beneficial 
to  both  parties. 

Importance  of  Merchandising. — The  business  of  mer- 
chandising ranks  as  one  of  the  most  important  in  the 
United  States.  Every  person  is  a  merchant  at  one  time 
or  another.  In  the  United  States  about  4,000,000  people 
make  a  living  by  trade.  Only  agriculture  and  manufac- 
turing give  employment  to  larger  numbers. 

Storage. — A  merchant  buys  in  large  quantities  and  sells 
in  small  quantities.  His  business  is  to  provide  goods  at 
the  time  and  in  the  quantities  needed.  All  merchants 
store  goods,  but  the  business  of  storage  may  be  sepa- 
rated from  merchandising,  as  it  is  by  many  warehouse- 
men. 

Though  storage  is  an  economic  service,  it  may  be  a 
means  of  "cornering"  the  market.  For  example,  a  man 
may  buy  all  the  eggs  for  sale  and  place  them  in  storage. 
He  has  "cornered"  the  market  and  may  refuse  to  sell 
except  at  an  exorbitant  price.  "Cornering"  the  market 
is  a  dangerous  game.  As  prices  rise  goods  will  flow  from 
other  places  and  this  tends  to  lower  the  market  price. 
Probably  more  money  has  been  lost  than  gained  by 
attempts  to  "corner"  a  market. 

If  goods  are  stored  in  time  of  abundance  and  sold  in 
time  of  scarcity,  the  market  tends  to  be  stabilized,  since 
buying  goods  for  storage  when  they  are  abundant  creates 
additional  demand,  and  selling  them  when  they  are  scarce 
creates  additional  supply.  The  price  of  eggs  in  June,  for 
example,  would  be  lower  were  it  not  for  the  thousands  of 


MERCHANDISING  163 

cases  of  eggs  that  are  put  in  storage  during  that  month, 
and  the  price  of  eggs  in  January  would  be  higher  were  it 
not  for  the  eggs  taken  out  of  storage  in  January.  If,  how- 
ever, a  ''corner"  is  created  in  storage  eggs,  famine  prices 
may  be  charged  for  the  part  of  the  eggs  taken  out  of  storage 
and  much  of  the  supply  of  storage  eggs  be  permitted  to 
spoil  or  be  sold  for  other  than  food  purposes.  This  is 
uneconomic,  but  the  speculator  may  be  enriched  by  charg- 
ing more  for  a  part  of  the  supply  than  he  could  get  for 
the  entire  stock. 

The  High  Cost  of  Selling. — Professor  Gerstenberg  *  re- 
marks that  the  cost  of  selling  the  world's  goods  is  greater 
than  the  cost  of  producing  them.  For  many  goods  this  is 
certainly  true.  In  recent  years  the  cost  of  selling  has  been 
rising,  because  the  public  now  demands  more  service. 
Delivery,  fancy  packages,  charge  accounts,  return  of  goods, 
and  telephone  service  cost  money.  This  expense  must  be 
met  by  an  increased  price.  Much  of  this  cost  might  be 
lessened,  if  those  who  carry  goods  home  were  given  a  dis- 
count or  those  who  pay  cash  received  some  benefit  from 
such  payments.  The  man  who  carries  home  his  purchases 
and  pays  in  cash  is  obliged  to  help  support  an  expensive 
delivery  system  and  must  help  meet  the  loss  from  bad 
accounts.  ''.The  consumer  pays  for  the  oil  used  in  the 
engine,  the  ink  used  in  printing  the  invoice,  the  book- 
keeper's pen,  the  chairman's  mahogany  desk,  the  cost  of 
cutting  the  grass  in  front  of  the  office,  the  director's  motor- 
car, the  pages'  buttons,  the  firm's  subscriptions  to  charity, 
the  very  smoke  that  floats  from  the  tall  chimney;  and, 
finally,   the  simple  or  elaborate  tomb  to  mark  the  last 

*  Principles  of  Business,  p.  414. 


i64  THE   ELEMENTS   OF   ECONOMICS 

resting-place  of  the  body  of  the  man  who  possessed  the 
requisite  genius  to  make  the  dream  a  reality."  * 

Salesmanship. — Many  articles  sell  themselves.  One 
goes  to  a  grocery  store  and  buys  potatoes,  apples,  and 
flour,  but  even  in  such  simple  purchases  some  qualities  of 
salesmanship  help.  Customers  prefer  to  go  to  a  grocery 
where  the  clerks  are  polite,  clean,  know  the  stock,  and 
give  honest  weight. 

The  selling  of  many  goods,  such  as  stocks  and  bonds, 
requires  expert  knowledge  and  is  almost  a  profession. 
Among  the  qualities  of  a  good  salesman  must  be  knowl- 
edge of  the  stock  and  confidence  in  it — if  he  cannot  have 
confidence  he  should  resign — a  pleasant  manner  and  tidy 
appearance  and  some  knowledge  of  psychology,  which  latter 
he  may  have  without  knowing  the  meaning  of  the  word. 

The  art  of  selling  books  has  largely  passed  with  the  prac- 
tical disappearance  of  the  old  bookstore  and  its  clerks 
who  knew  and  loved  books.  The  book  department  of  the 
average  department  store  is  generally  conducted  without 
much  knowledge  of  books.  The  man  who  asked  for  a 
copy  of  a  book  by  John  Stuart  Mill  and  was  handed  The 
Mill  on  the  Floss,  did  not  have  a  unique  experience.  The 
automobile  salesman,  on  the  contrary,  generally  knows  his 
business  and  conducts  it  upon  scientific  lines. 

Advertising. — You  may  have  wondered  why  a  manu- 
facturer or  a  dealer  would  pay  $i5,ckx)  for  one  page  in  one 
issue  of  a  weekly  magazine.  The  answer  is  that  it  pays. 
Advertising  is  a  part  of  the  expense  of  merchandising,  and 
the  cost  must  be  paid  by  the  consumer.     This  does  not 

♦Derrick,  How  to  Reduce  Selling  Costs.  Quoted  by  Gerstenberg, 
Principles  of  Business,  p.  413. 


THE  "CURB"  MARKET  ON  BRuAD  dIKEET,  NEW  YORK 

Here  stocks  and  bonds  were  marketed  which  were  not  listed  on  the  Stock 
Exchange.  On  June  27,  iq2i,  the  New  York  Curb  Market  Association  moved 
into  its  new  building  on  Trinity  Place. 


i66  THE  ELEMENTS   OF  ECONOMICS 

mean  that  the  large  advertisers  charge  higher  prices  than 
those  who  advertise  less  extensively,  for  the  large  adver- 
tiser may  do  so  extensive  a  business  as  to  make  the  charge 
against  a  single  article  exceedingly  small.  Advertising 
renders  an  economic  service  in  teUing  where  goods  may  be 
obtained  and  in  explaining  the  advantages  of  certain  goods. 
Some  advertising  is  merely  designed  to  cause  purchasers 
to  get  goods  from  one  dealer  rather  than  from  another  or 
to  cause  them  to  buy  one  article  rather  than  another. 
The  following  advertisement  illustrates  this: 

USE  BLANK'S  DENTAL  CREAM 

Why  Should  You  Use  An  Inferior  Article 

When  You  Can  Get  The  Best? 
It  Costs  No  More  Than  The  Imitations. 

Other  advertising  creates  a  new  demand.  For  example, 
a  dental  cream  might  be  advertised  as  follows: 

A   CLEAN   TOOTH  NEVER  DECAYS 

Your  Health,  Appearance,  And  Pocketbook 

Demand  Good  Teeth. 

Use  Blank's  Dental  Cream  And  Have  Clean  Teeth. 

The  advertising  of  electric  washing-machines  is  con- 
ducted so  as  to  create  (i)  a  desire  to  possess  a  washing- 
machine,  (2)  a  demand  for  the  particular  machine.  It 
combines  two  ideas  in  one  advertisement. 

Most  advertising  is  good,  though  some  kinds  are  better 


MERCHANDISING  167 

than  others.  Advertisements  that  disfigure  works  of  na- 
ture or  destroy  beauty  anywhere  are  to  be  condemned. 
It  is  doubtful  whether  such  advertising  is  profitable  in 
any  way.  It  repels  more  people  than  it  attracts.  Fortu- 
nately advertising  of  this  nature  is  on  the  decline. 

The  Principle  of  "Caveat  Emptor." — In  merchandising, 
the  rule  is  that  the  purchaser  must  be  on  his  guard.  After 
a  sale  is  made,  provided  there  was  no  misrepresentation, 
the  incident  is  closed.  Misrepresentation  may  come  with- 
out any  words  being  spoken.  In  selling  food  it  is  implied 
that  it  is  fit  for  human  consumption.  The  purchaser  has  a 
certain  degree  of  protection  in  the  desire  of  the  seller  to 
maintain  his  reputation;  he  may  generally  depend  upon 
goods  sold  under  a  trade-mark. 

The  requirement  of  the  government,  under  the  Pure 
Food  Act,  that  certain  food  products  and  drugs  must  be 
guaranteed  by  the  packers,  further  protects  the  purchaser. 

Purchasers  of  stocks  in  bogus  or  highly  speculative  cor- 
porations have  no  adequate  protection  in  most  states.  If 
no  misrepresentation  occurred,  the  sale  stands.  Stocks 
and  bonds  that  are  sold  on  the  New  York  Stock  Exchange 
are  all  genuine  securities  of  reputable  corporations;  no 
others  can  be  listed.  But  stocks  of  corporations  of  the 
most  doubtful  value  are  freely  sold  in  most  places.  A 
large  number  of  people  are  always  eager  to  invest  in  any 
'^ get-rich-quick"  concern.  A  few  years  ago  mining  stocks 
of  this  nature  were  being  sold.  Now  oil  stocks  are  more  in 
demand.  It  is  a  common  saying  that  some  promoters  can 
sell  the  blue  sky.  Hence  "blue-sky  laws"  have  been 
passed  in  some  states  to  prevent  the  sale  of  securities  of 
doubtful  companies.     These  ''blue-sky  laws"  require  that 


i68  THE   ELEMENTS   OF  ECONOMICS 

no  stock  shall  be  sold  unless  permission  is  obtained  from  a 
designated  state  official.  To  obtain  this  permission  the 
exact  status  of  the  corporation  and  its  prospects  must  be 
submitted  and  sworn  to  under  oath. 

Summary. — Merchandising  is  one  of  the  chief  employ- 
ments of  our  people.  Good  merchandising  consists  in  giv- 
ing full  value  and  giving  it  in  a  pleasant  manner.  The 
seller  of  an  article  should  benefit  and  so  should  the  pur- 
chaser. Supplying  goods  in  the  quantity  in  which  they 
are  desired  and  at  the  time  they  are  desired  is  the  func- 
tion of  a  dealer.  Storing  goods  when  they  are  plentiful 
and  selling  them  when  they  are  scarce  is  an  economic 
service.  The  high  cost  of  selling  is  the  result  of  demands 
from  the  pubHc  for  increased  service.  Advertising  is  a 
legitimate  business  expense.  The  purchaser  pays  for  ad- 
vertising, but  the  cost  is  usually  slight  to  each  purchaser. 
The  legal  principle  of  caveat  emptor  means  that  the  pur- 
chaser must  be  on  his  guard.  This  does  not  justify  mis 
representation. 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1.  What  are  the  advantages  of  "chain  stores"?     What  are  the 

disadvantages  ? 

2.  Why  have  the  mail-order  houses  been  able  to  do  such  a  large 

business?  What  advantages  do  they  have  over  the  local 
dealer  in  a  small  town?  Is  it  fair  to  local  dealers  to 
patronize  mail-order  houses  ? 

3.  Give  some  personal  experiences  in  dealing  with  good  sales- 

men; with  poor  salesmen. 

4.  Secure  a  copy  of  a  popular  magazine  and  show  what  adver- 

tisements you  consider  the  best.  Show  why  they  are 
better  than  others. 


MERCHANDISING      '  169 

5.  Write  a  suitable  advertisement  for  a  real-estate  development 

near  your  city.     Write  an  advertisement  for  a  toilet-soap. 

6.  Advertisers  wish  to  know  what  sort  of  advertising  is  most 

profitable.     How  can  they  get  this  information? 

7.  In  the  State  of  New  York  any  one  is  at  liberty  to  remove 

advertising  signs  which  are  placed  upon  public  property 
along  the  public  roads.  Give  your  reasons  for  approving 
or  condemning  this  legislation. 

8.  What  advertising  do  you  think  is  harmful  to  a  community  ? 

9.  Most  physicians  and  dentists  consider  that  it  is  undignified 

for  them  to  advertise.     Show  why  you  agree  or  disagree 
with  them. 
[Q.     Should  churches  advertise?     Write  an  advertisement  which 
you  would  consider  proper  for  a  church. 


CHAPTER  XV 
INSURANCE 

What  is  Insurance? — Insurance  is  a  protection  against 
risk.  Financial  loss  caused  by  death,  accident,  illness,  fire, 
flood,  theft,  and  other  perils  may  be  partially  or  wholly 
avoided  by  insurance.  Insurance  secures  freedom  from 
anxiety.  A  man  whose  house  is  insured  benefits  though 
his  house  does  not  burn.  A  man  whose  life  is  insured  has 
a  knowledge  that  those  who  are  dependent  upon  him  will 
not  suffer  from  poverty  if  he  should  die.  This  is  worth 
what  it  costs. 

Insurance  has  sometimes  been  compared  to  gambling. 
It  has  been  alleged  that  if  a  person  insures  his  life  for 
$i,ooo  by  paying  a  premium  of  thirty  dollars  a  year,  he  is 
betting  thirty  dollars  against  $i,ooo  that  he  will  die  during 
the  year.  This  is  incorrect.  He  is  purchasing  protection 
and  he  receives  it.  This  is  an  economic  service  and  gam- 
bling never  renders  an  economic  service. 

Fire  Insurance. — In  its  modern  form,  Nicholas  Barbon 
of  London  originated  fire  insurance.  This  was  in  the  year 
1667,  one  year  after  the  great  fire  in  London.  Barbon 
insured  buildings  only.  Richard  Povey,  also  of  London, 
in  1706  added  protection  of  goods.  At  first  the  business 
was  conducted  by  individuals,  but  in  1720  the  London 
Assurance  and  the  Royal  Exchange  Assurance  were  granted 
corporate    charters.     The    first   American    company    was 

170 


INSURANCE  171 

organized  in  Charleston,  South  Carolina,  in  1735.  How- 
ever, it  survived  only  a  few  years.  The  Philadelphia 
Contributionship  was  founded  in  1 7 5 2 .  Benjamin  Franklin 
was  interested  in  this  company  and  served  as  a  director  for 
several  years.  By  the  beginning  of  the  nineteenth  century 
the  country  was  well  supplied  with  fire-insurance  com- 
panies. Many  of  them  failed  through  incompetent  man- 
agement. As  a  result  the  state  governments  undertook 
to  exercise  supervision  over  the  conduct  of  insurance  cor- 
porations. 

Most  insurance  against  loss  by  fire  is  carried  by  large 
companies  doing  business  over  the  entire  country.  This 
spreading  of  risks  over  a  large  field  eliminates  the  danger 
that  a  company  may  become  bankrupt  by  a  great  local 
fire.  To  protect  itself  further  against  a  local  loss,  a  com- 
pany finding  itself  carrying  too  many  risks  in  one  locality 
will  reinsure  some  of  them  in  another  company. 

The  Contract. — ^A  fire-insurance  contract  is  known  as  a 
policy.  This  policy  describes  the  property  insured,  states 
terms  and  rates,  and  how  long  the  insurance  is  to  last.  The 
rate  charged  depends  upon  the  nature  of  the  property, 
upon  the  character  of  the  neighboring  buildings,  and  upon 
the  protection  against  fire  furnished  by  the  community. 
Fire-insurance  contracts  generally  run  for  three  years. 
Companies  will  insure  for  three  years  for  twice  the  amount 
charged  for  one  year. 

Prevention  of  Fire. — The  losses  by  fire  in  the  United 
States  are  annually  greater  than  those  in  any  European 
country.  It  would  be  unfair  to  draw  the  conclusion  that 
Americans  are  less  careful  in  preventing  fires  than  are 
Europeans,  because  there  are  few  wooden  houses  in  Europe, 


172  THE   ELEMENTS   OF   ECONOMICS 

and  private  houses  are  less  thoroughly  heated  there  than  in 
America.  The  economic  loss  by  fire  is  very  great;  in  one 
year  (191 7)  the  fire  losses  in  the  United  States  amounted 
to  $250,753,640;  during  the  year  191 7  in  New  York  City 
alone  there  were  14,053  fires,  with  a  loss  of  $14,278,523. 
Doubtless  a  large  proportion  of  this  loss  could  have  been 
prevented  by  greater  care  in  regard  to  flues,  keeping  live 
coals  from  contact  with  wood,  and  cleaning  away  rubbish. 
In  some  cities  there  is  a  day  each  year  set  apart  as 
*' fire-prevention  day."  On  this  day  citizens  are  asked 
to  inspect  stoves  and  flues,  clean  closets  and  cellars, 
and  to  see  that  danger  from  fire  is  reduced  as  much  as 
possible. 

Lloyds. — ^A  man  whose  name  was  Lloyds  kept  a  coffee- 
house in  London  in  the  seventeenth  century.  This  place 
became  a  resort  for  men  engaged  in  shipping  and  foreign 
trade.  Marine,  or  sea,  insurance  grew  to  be  a  part  of  the 
business  transacted,  and  the  famous  organization  known  as 
Lloyds  perpetuates  the  name. 

Lloyds  does  not  insure  property  of  any  kind  but  furnishes 
headquarters  for  individuals  and  companies  engaged  in  the 
insurance  business.  It  has  a  system  for  the  inspection  of 
ships  with  agents  in  every  important  port  all  over  the 
world.  The  persons  who  do  business  at  Lloyds  specialize 
in  marine  insurance  but  write  every  variety  of  insurance. 
At  Lloyds  a  person  who  is  planning  to  give  a  pageant  may 
be  protected  against  rain,  a  dealer  in  court  costumes  may 
be  insured  against  the  court  going  into  mourning,  or  the 
risk  of  war  may  be  the  object  of  a  policy,      i 

Life  Insurance. — The  first  real  life  insurance  company 
wa«^  the  ''Old  Equitable"  of  London,  organized  in  1762. 


INSURANCE  173 

The  beginning  of  life  insurance  in  America  was  a  society 
formed  in  1759  in  Philadelphia  for  the  benefit  of  Presby- 
terian clergymen  and  their  families.  The  Insurance  Com- 
pany of  North  America  was  organized  in  1796.  This  was 
followed  by  the  New  York  Life  &  Trust  Company  in  1830. 
The  first  mutual  company  was  the  Mutual  Life  Insurance 
Company  of  New  York,  organized  in  1843. 

Life-insurance  companies  are  either  stock  companies  or 
mutual  companies.  The  latter  are  supposed  to  be  managed 
by  the  policyholders,  but  actually  the  management  is  in 
the  control  of  a  small  group  of  financiers.  A  very  con- 
siderable amount  of  life  insurance  is  carried  by  fraternal 
organizations  of  various  kinds,  losses  being  paid  by  assess- 
ments. These  societies  are  subject  to  the  inspection  of 
state  departments  of  insurance  and  are  obliged  to  conduct 
their  business  on  approved  business  lines. 

The  Life-Insiirance  Policy. — The  contract  between  the 
insured  and  the  insurer,  known  as  the  policy,  must  con- 
form to  state  standards.  There  are  various  kinds  of 
policies,  the  most  common  are  straight  life,  limited-pay- 
ment life,  and  endowment.  A  straight  life  provides  for 
life  insurance,  the  premiums  payable  at  stated  intervals 
so  long  as  the  policy  is  in  force.  A  limited-term  policy 
provides  for  a  certain  number  of  premium  payments. 
After  these  have  been  made  the  policy  is  ''paid-up"  and 
no  further  premiums  are  required.  An  endowment  policy 
furnishes  protection  during  the  term  for  which  it  is  written 
and,  if  the  insured  is  living  at  the  end  of  the  term,  the 
amount  of  the  policy  is  paid  to  him. 

Dividends. — Dividends  are  payments  made  to  policy- 
holders while  the  policy  is  in  force  or,  in  addition  to  the 


174  THE   ELEMENTS   OF   ECONOMICS 

principal  when  an  endowment  policy  becomes  due.     Divi- 
dends spring  from  two  sources: 

1.  Insurance  is  generally  based  on  the  assumption  that 
the  rate  of  interest  is  4  per  cent.  Should  the  company  be 
able  to  lend  its  funds  at  more  than  4  per  cent  there  will  be 
a  surplus. 

2.  The  premiums  are  a  little  more  than  necessary  to 
cover  the  risk. 

Dividends  may  be  used  at  the  option  of  the  policy- 
holder either  to  reduce  the  next  premium  or  to  increase 
the  amount  of  insurance,  or  may  be  paid  in  cash. 

The  Scientific  Basis  of  Life  Insurance. — Though  the 
future  cannot  be  foretold  in  reference  to  an  individual,  if  a 
large  number  of  persons  in  good  health  at  any  specified  age 
be  taken,  it  can  be  told  how  many  will  be  surviving  at  ten, 
twenty,  or  any  number  of  years.  There  are  a  number  of 
mortality  tables  calculated  for  every  age,  but  the  American 
Experience  Table  is  most  widely  used  in^the  United  States. 
The  accuracy  of  these  tables  is  manifest  from  the  existence 
and  strength  of  American  insurance  companies.  Of  course 
the  insured  pays  more  than  the  amount  of  risk,  as  the 
premiums  are  "loaded'  to  cover  the  overhead  charges  and 
to  give  a  profit  to  the  company.  Part  of  the  earnings  of 
the  stock  companies  is  paid  to  the  policyholders  in  divi- 
dends, and  in  mutual  companies  the  policyholders  share  in 
the  earnings. 

State  Supervision  of  Insurance. — To  protect  the  public 
against  improperly  organized  or  poorly  managed  com- 
panies, the  various  states  prescribe  the  form  of  insurance 
contracts  which  may  be  written,  and  supervise,  through  a 
superintendent  of  insurance  or  other  state  official,  the  con- 


INSURANCE  175 

duct  and  resources  of  the  company.  The  insurance  com- 
panies find  reason  to  complain  of  the  lack  of  uniformity 
of  state  regulations  and  especially  of  the  burden  of  taxa- 
tion which  they  are  obliged  to  bear.  They  would  prefer 
Federal  regulation  because  it  would  be  uniform  throughout 
the  states,  and  they  claim  that  high  taxation  is  against  the 
interests  of  the  policyholders,  as  it  must  be  passed  on  to 
the  insured. 

In  Italy  life  insurance  is  a  State  monopoly.  New  Zea- 
land engages  in  life  insurance  as  a  State  activity  but  permits 
private  companies  to  do  business.  Wisconsin,  after  enact- 
ing insurance  laws  which  were  regarded  as  unduly  harsh 
by  the  insurance  companies  and  which  led  some  companies 
to  withdraw  from  that  state,  entered  upon  life  insurance 
as  a  state  enterprise  in  19 13. 

Old  Age  Insurance. — ^A  very  large  number  of  people 
have  provided  for  their  old  age  by  insurance  ever  since 
endowment  and  annuity  forms  of  insurance  have  been 
written.  Many  persons  are  unable  to  afford  the  expense 
of  thus  providing  for  old  age.  Endowment  for  old  age  in 
the  form  of  pensions  for  soldiers,  policemen,  firemen,  and 
teachers  has  long  been  common  in  this  country.  Some- 
times the  whole  expense  is  borne  by  the  public;  sometimes 
the  expense  has  been  shared  by  the  annuitant.  The  argu- 
ment in  favor  of  compulsory  insurance  for  state  and  city 
employees  of  a  non-political  nature  who  are  receiving  a 
wage  or  salary  insufficient  to  enable  them  to  provide  for 
old  age,  seems  just  as  strong  when  considered  in  reference 
to  those  who  are  in  private  employ.  In  Germany  there  is 
compulsory  old-age  insurance  for  most  employees,  the  em- 
ployer and  employee  sharing  the  expense  and  the  State 


176  THE   ELEMENTS   OF  ECONOMICS 

adding  a  contribution  of  fifty  marks  annually.  In  Great 
Britain,  Australia,  and  New  Zealand  every  working  man  is 
given  a  small  pension  when  he  reaches  the  age  of  seventy 
provided  his  annual  income  is  below  $153  a  year.  The 
entire  cost  of  these  pensions  is  borne  by  the  State. 

Accident  Insurance. — The  chance  of  accident  is  ever- 
present.  Numerous  private  companies  insure  against  acci- 
dent, but  on  account  of  the  expense  few  working  men  can 
avail  themselves  of  this  insurance.  The  British  Work- 
mens'  Compensation  Act  of  1897  requires  the  employer, 
in  case  of  disability  on  account  of  an  accident  incurred 
while  engaged  in  work,  to  pay  one-half  of  the  former  wage, 
not  exceeding  one  pound  per  week,  and  in  case  of  death 
from  accident  an  amount  equal  to  three  years'  wage  but 
not  less  than  £150  nor  more  than  £300.  Most  British 
employers  of  labor  insure  their  employees  in  a  liability 
insurance  company,  though  the  law  does  not  prescribe 
this,  permitting  employers  to  meet  its  conditions  in  any 
way  they  may  prefer.  In  Germany  in  1884  an  act  was 
passed  which  compelled  employers  of  labor  to  insure  their 
employees  against  accident  at  a  rate  of  two-thirds  their 
former  wage  in  case  of  total  disability  and  lesser  amounts 
for  partial  disability.  Until  recently  laborers  in  the  United 
States  had  only  the  protection  afforded  by  a  lawsuit  against 
their  employer  in  case  of  accident.  If  it  could  be  shown 
that  the  employee  was  negligent  or  that  a  fellow  employee 
was  negligent  no  relief  was  afforded  by  law.  Recently 
many  of  the  American  states  have  enacted  laws  requiring 
employers  to  insure  their  working  men  against  accidents. 

Insurance  against  Sickness. — Insurance  against  sick- 
ness is  more  difficult  to  manage  than  other  forms  of  insur- 


INSURANCE  177 

ance,  as  the  chance  of  fraudulent  claims  is  greater.  How- 
ever, insurance  against  sickness  is  written  by  many  com- 
panies and  fraudulent  claims  are  reported  to  be  relatively 
rare.  In  Germany  there  has  been  compulsory  insurance 
for  sickness  among  working  men  since  1883,  one- third  of 
the  expense  being  bopne  by  the  employer  and  two-thirds 
by  the  employees.  Great  Britain  introduced  compulsory 
insurance  of  this  kind  in  191 1,  but  in  the  United  States 
there  is  no  insurance  against  sickness  for  working  men, 
except  such  as  is  afforded  by  fraternal  orders  and  the  aid 
that  may  be  extended  by  labor  unions. 

The  Usual  Objections  to  State  Insurance  of  Working 
Men. — It  is  often  claimed  that  insurance  of  laboring  men 
makes  them  improvident;  if  old  age,  accident,  and  sickness 
are  provided  for  by  insurance,  the  laborer  will  not  be 
encouraged  to  provide  for  himself.  Unfortunately,  without 
insurance  the  ordinary  laborer  either  cannot  or  will  not 
provide  against  these  perils,  and  the  amount  of  the  insur- 
ance is  never  so  great  as  to  act  as  a  deterrent  to  savings. 
It  is  further  argued  that  it  is  a  burden  upon  the  employer, 
but  if  the  same  burden  is  placed  upon  all  employers  it 
becomes  a  part  of  the  cost  of  production  and  may  be 
shifted  to  the  public,  where  it  belongs.  The  statement, 
often  made,  that  the  payment  or  pension  is  spent  fooHshly 
amounts  to  nothing.  Wages  are  often  spent  foolishly  and 
so  are  the  salaries  of  professional  men. 

Group  Insurance. — Group  insurance  is  a  recent  form  of 
protection  against  risk  which  has  become  popular.  Any 
employer  of  fifty  persons  may  take  out  a  group  policy 
which  will  protect  each  of  the  fifty.  Only  one  policy  is 
written,  but  a  certificate  is  given  to  each  person  insured. 


178  THE   ELEMENTS   OF   ECONOMICS 

The  group  policy  usually  covers  only  the  risk  of  death,  but 
may  include  other  risks.  Premiums  on  group  insurance 
are  lower  than  in  other  kinds  of  insurance,  and  medical 
examination  is  not  required  if  the  protection  is  only  against 
the  risk  of  death.  All  the  great  life-insurance  companies 
will  insure  on  the  group  plan.  Many  bankers,  college 
trustees,  and  manufacturers  have  taken  out  group  insur- 
ance for  their  employees. 

Summary. — Insurance  is  protection  against  risks.  The 
insured  receives  what  he  purchases,  whether  or  not  mis- 
fortune comes  to  him.  Fire  insurance  is  the  oldest  kind 
of  insurance.  It  is  now  regarded  as  a  part  of  the  necessary 
expense  of  business.  Life  insurance  has  become  prominent 
since  the  middle  of  the  last  century.  The  contract  between 
insurer  and  insured  is  called  a  policy.  In  hfe  insurance 
these  policies  are  ordinarily  straight  life,  limited-payment 
life,  or  endowment.  Life  insurance  has  a  scientific  basis 
in  the  mortality  experience  tables.  Insurance  against  old 
age,  accidents,  and  sickness  are  among'  the  more  recent 
kinds  of  insurance.  Insurance  of  certain  classes  of  work- 
ing men  is  compulsory  in  Germany  and  England.  Some 
American  states  require  employers  to  insure  their  em- 
ployees against  such  accidents  as  may  happen  while  actu- 
ally engaged  in  their  duties. 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

I.  Some  of  the  great  railroad  systems  insure  themselves  against 
fire.  Why  might  it  not  be  a  wise  policy  for  a  grocer  to 
place  the  same  amount  in  his  bank  each  year  that  insurance 
would  cost  him  and  thus  insure  himself?  Is  there  any  dif- 
ference between  his  risk  and  that  of  a  railroad  company? 


INSURANCE  179 

2.  Make  a  list  of  varieties  of  insurance  not  mentioned  in  the 

text.  What  are  the  advantages  of  these  kinds  of  insurance  ? 
What  are  the  disadvantages,  if  any? 

3.  Should  a  man  twenty-five  years  of  age  insure  his  life  on  the 

straight  life,  the  limited  payment,  or  the  endowment  plan? 
What  are  the  advantages  of  each?  Which  plan  would  be 
better  for  a  man  fifty-five  years  old? 

4.  What  fraternal  organizations  having  lodges  in  your  city  insure 

their  members  ?     What  kinds  of  insurance  do  they  provide  ? 

5.  Is  any  insurance  of  workmen  required  in  your  state?      Give 

the  principal  requirements  of  the  law.  What  do  the  em- 
ployers think  of  it?     The  employees? 

6.  How  does  insurance  differ  from  gambling? 

7.  Some  people  have  said  that  in  life  insurance  a  person  has  to 

die  to  win.  Show  the  fallacy  of  this  argument  against  life 
insurance. 


CHAPTER  XVI 
MONEY 

What  is  Money? — Whatever  passes  freely  from  hand  to 
hand  in  the  purchase  of  goods,  or  services,  or  in  payment 
of  debt  is  money.  In  colonial  days  wampum  and  tobacco 
were  so  used.  They  were  money,  because  they  did  the 
work  of  money.  Now  coins  or  notes  issued  by  the  govern- 
ment are  money;  so  are  bank-notes  issued  by  banks  under 
authority  given  by  the  government.  Checks  and  drafts 
are  not  money,  because  they  do  not  pass  freely.  A  dollar 
bill  will  be  accepted  anywhere  without  regard  to  the 
character  of  the  person  who  offers  it.  A  check  or  draft 
ordinarily  will  not  be  accepted  for  the  purchase  of  a  rail- 
road ticket  or  for  postage  stamps,  and  an  unknown  person 
always  has  difficulty  in  using  checks  or  drafts. 

What  Money  Does. — Money  performs  three  services: 

1 .  It  serves  as  a  medium  of  exchange. 

2.  Money  is  a  measure  of  value. 

3.  It  is  a  standard  for  deferred  payments. 

Money  as  a  Medium  of  Exchange. — :Exchanges  may 
take  place  without  the  use  of  money.  Barter  was  em- 
ployed long  before  money  was  known.  Barter,  or  the 
direct  exchange  of  one  thing  for  another,  is  even  now  fre- 
quently employed.  In  the  rural  districts  eggs  and  butter 
are  taken  to  the  store  and  exchanged  for  coffee  and  sugar. 
Even  in  the  city  some  newspapers  have  an  ''exchange" 
column,  where  those  who  have  articles  they  do  not  need 

180 


MONEY  i8i 

may  advertise  to  exchange  them  for  goods  which  they 
desire.  Barter  is  inconvenient  because  the  person  who 
wishes  an  article  frequently  cannot  find  another  person 
who  both  desires  the  article  to  be  bartered  and  has  some- 
thing acceptable  to  offer  in  exchange.  For  example,  you 
may  have  a  bicycle  which  you  wish  to  exchange  for  a 
cornet.  There  may  be  difficulty,  in  finding  a  person  who 
wants  a  bicycle  and  has  a  cornet.  Then  there  is  lack  of 
uniformity  in  the  values  of  articles.  The  cornet  may  be 
worth  two  bicycles  and  something  has  to  be  paid  *'  to  boot." 

Money  overcomes  all  these  difficulties.  It  is  in  universal 
demand  and  can  be  offered  in  such  units  as  may  be  desired. 
Every  one,  except  a  miser,  wants  money  for  what  it  will 
purchase.  It  may  be  spent  for  present  wants  or  kept  to 
supply  future  wants. 

Money  as  a  Measure  of  Value. — To-day  values  of  goods 
and  services  are  commonly  measured  in  terms  of  money. 
When  we  say  that  a  horse  is  worth  $200,  a  cow  worth  $85, 
and  a  dog  worth  $1,  we  measure  all  these  by  a  common 
standard.  Values  may  be  measured  in  terms  of  a  standard 
which  is  not  used  as  a  medium  of  exchange.  In  colonial 
times  values  were  expressed  in  terms  of  Enghsh  money,  but 
exchanges  were  effected  by  many  varieties  of  foreign  coins. 
In  some  parts  of  the  United  States  values  are  still  expressed 
in  terms  of  shillings,  though  there  are  no  shillings  now  in 
circulation  in  the  United  States. 

Money  as  a  Standard  for  Deferred  Payments. — ^Goods  or 
services  may  be  bought  now  and  payment  made  at  some 
time  in  the  future.  Justice  to  both  debtor  and  creditor 
demands  that  the  purchasing  value  of  money  should  change 
as  little  as  possible.     A  debt  for  $100,  contracted  in  1900 


i82  THE  ELEMENTS   OF  ECONOMICS 

and  paid  in  1920,  would  not  have  returned  to  the  creditor 
the  purchasing  power  which  he  deUvered  in  1900.  A  debt 
for  $100,  contracted  during  the  World  War  and  paid  now, 
would  require  the  debtor  to  return  more  purchasing  power 
than  he  received.  Changes  in  the  value  of  money  always 
injure  either  debtor  or  creditor. 

Qualities  Necessary  .  for  Good  Metallic  Money. — A 
metal  to  be  used  as  money  should  possess  large  value  in 
small  compass.  It  should  exist  in  quantities  sufficient  to 
furnish  the  necessary  amount  of  money.  In  the  second 
place  it  should  have  stability  of  value.  Absolute  stability 
of  value  is  impossible,  but  it  should  be  a  metal  which  differs 
in  value  as  little  as  possible  from  time  to  time.  Another 
necessary  quality  is  durability.  A  good  metal  for  monetary 
purposes  must  be  one  which  is  easily  recognized  and  diffi- 
cult to  counterfeit.  This  quality  is  known  as  cogniza- 
bility.  Other  desirable  qualities  are  homogeneity,  meaning 
that  each  unit  of  a  certain  weight  and  fineness  must  be 
like  any  other  unit  of  equal  weight  and  fineness,  and 
divisibility,  which  means  the  ability  to  be  divided  easily 
into  units  without  loss  of  value. 

The  qualities  mentioned  above  attach  especially  to  gold 
and  silver,  though  more  particularly  to  gold.  Gold  has 
become  the  recognized  standard  of  all  the  great  commercial 
nations  of  the  world,  silver  being  retained  as  ''token 
money,"  or  change. 

Coinage. — When  metals  were  first  used  as  money,  they 
passed  by  weight.  The  names  of  such  coins  as  the  English 
pound,  the  Jewish  shekel,  and  the  Greek  talent  show  that 
they  were  originally  measures  of  weight.  Coinage  became 
an  official  guarantee  of  fineness  and  weight  and  did  away 


MONEY  183 

with  the  necessity  of  testing  metals  whenever  exchanges 
were  made.  The  coinage  of  money  was  originally  the 
function  of  kings,  and  kings  frequently  reduced  the  amount 
of  metal  in  coins,  though  the  name  of  the  coin  remained 
the  same.     This  practice  is  known  as  ''debasing  "  the  coin. 

Seigniorage  and  Brassage. — Under  the  despotic  sover- 
eigns of  mediaeval  Europe,  debasing  the  coinage  was  com- 
mon. Not  infrequently  the  coins  were  debased  under  the 
guise  of  a  charge  for  coinage  which  was  called  seigniorage 
and  was  maintained  as  a  sovereign  right.  Money  thus 
debased  generally  fell  in  purchasing  value  to  the  value  in 
exchange  of  its  metallic  content.  If  a  country  had  no 
foreign  trade,  debased  coins  might  circulate  for  a  time  at 
their  face  value,  if  not  issued  in  excessive  quantities  and 
if  confidence  existed  that  they  could  be  passed  to  others. 
But  debased  coins  will  circulate  in  foreign  countries  only 
at  the  value  of  their  metallic  content.  Seigniorage  is  not 
at  present  practised  by  any  great  nation. 

Some  European  nations  extract  from  the  metal  the  cost 
of  coinage;  this  is  called  brassage.  The  United  States 
charges  no  brassage  for  its  gold  coins  and  has  free  coinage 
of  no  metal  except  gold. 

Free  Coinage. — A  country  has  free  coinage  of  a  metal 
if  it  will  coin  all  sufficiently  large  quantities  of  that  metal 
which  are  brought  to  the  mint.  The  United  States  will 
exchange  gold  coins  of  an  equivalent  weight  for  gold  bul- 
lion, when  brought  to  the  mint  in  quantities  to  the  value 
of  $100  or  more.  This  is  free  and  unlimited  coinage.  The 
gold  dollar  contains  23.22  grains  of  fine  gold.  On  account 
of  the  small  size  of  the  gold  dollar,  its  coinage  was  discon- 
tinued in  1890. 


i84  THE   ELEMENTS   OF   ECONOMICS 

The  other  metals  used  by  the  United  States  for  monetary 
purposes  are  purchased  in  the  market  at  current  prices  and 
coined  as  needed  and  as  the  law  directs.  The  metallic 
value  of  none  of  the  minor  coins  is  equal  to  their  face 
value.  They  circulate  within  the  United  States  at  par 
because  they  are  not  issued  in  large  quantities  and  because 
they  are  sustained  by  the  credit  of  the  United  States. 

Gresham*s  Law. — According  to  Gresham's  law — so  called 
in  honor  of  its  discoverer,  Sir  Thomas  Gresham — when 
two  or  more  kinds  of  money  are  in  circulation  at  the 
same  time,  the  poorer  money  will  tend  to  drive  the  better 
money  out  of  circulation. 

The  application  of  Gresham' s  law  is  both  national  and 
international.  A  person  who  has  a  worn  coin  or  a  dirty 
paper  dollar  will  put  it  in  circulation  and  retain  his  better 
money,  even  though  each  has  the  same  purchasing  power. 
Gresham,  however,  meant  his  law  to  apply  to  coins  which 
had  the  same  face  value,  but  different  value  as  metals.  If 
the  metal  in  a  coin  has  more  value  for  use  in  the  arts  than 
for  monetary  purposes,  it  will  be  withdrawn  from  circula- 
tion and  its  metal  used  for  making  some  piece  of  jewelry 
or  other  article.  Moreover,  no  one  would  think  of  taking 
metal  to  the  mint  if  its  value  as  metal  is  greater  than  the 
value  of  the  coin  which  would  be  made  from  the  metal. 
Thus  the  supply  of  the  metal  for  the  better  coin  is  cut 
off  at  the  source. 

In  the  payment  of  debts  owed  to  foreign  creditors  coins 
are  worth  only  their  metallic  value,  hence  the  better 
money  will  go  abroad  and  the  poorer  money  will  stay  at 
home.  The  following  illustration  will  make  clear  the  way 
in  which  poor  money  drives  good  money  out  of  circulation: 


MONEY  185 

Let  us  assume  that  each  of  two  countries  has  free  coinage 
of  gold  and  that  each  country  has  $1,000,000  in  circulation 
and  the  rapidity  of  circulation  in  each  country  is  the  same 
and  other  conditions  in  the  two  countries  are  similar. 
Under  these  conditions  one  dollar  would  have  the  same 
purchasing  value  in  each  country.  Now  suppose  that 
Country  A  puts  into  circulation  $250,000  in  debased  silver; 
it  will  then  have  a  total  circulation  of  $1,250,000  and  $1.25 
will  be  required  to  buy  what  $1  would  previously  have  pur- 
chased. In  Country  B  prices  have  not  changed  and  gold 
will  flow  from  Country  A  into  Country  B  because  it  will 
purchase  25  per  cent  more  in  the  latter  country.  This  will 
continue  until  the  volume  of  money  is  the  same  in  each 
country,  but  it  will  all  be  gold  in  Country  B.  Let  Coun- 
try A  add  another  $250,000  in  silver  and  it  will  drive 
another  $250,000  in  gold  out  of  the  country  and  by  con- 
tinuing this  practice  will  in  time  lose  its  gold  circulation 
and  go  on  a  silver  basis. 

Bimetallism  in  the  United  States. — The  truth  of  Gresh- 
am's  law  is  well  illustrated  by  the  history  of  attempts  at 
bimetallism  in  the  United  States.  When  the  mint  was 
opened  in  accordance  with  the  Act  of  1792,  there  wa.s  free 
coinage  of  both  gold  and  silver  at  the  ratio  of  15  to  i,  the 
silver  dollar  having  371  ^  grains  of  fine  silver  and  the  gold 
dollar  24^  grains  of  fine  gold.  The  silver  dollar  was 
therefore  fifteen  times  as  heavy  as  the  gold  dollar.  This 
was  at  the  time  the  market  ratio,  but  the  market  ratio 
soon  changed,  so  that  gold  was  more  valuable  as  metal 
than  as  money.  Under  these  circumstances  no  more  gold 
came  to  the  mint  and  what  had  been  in  circulation  disap- 
peared.    In  1834  Congress  changed  the  ratio  to  16  to  i> 


i86  THE   ELEMENTS   OF  ECONOMICS 

but  this  time  it  overvalued  gold,  and  silver  disappeared 
from  circulation.  In  order  to  retain  subsidiary  silver 
coins,  or  change,  in  circulation  Congress  reduced  their 
weight.  The  gold  discoveries  in  California  and  Australia 
still  further  separated  market  and  mint  valuations,  and  no 
silver  dollars  were  in  circulation  when  the  Civil  War  com- 
menced. Excessive  issues  of  paper  money  during  the  war 
drove  both  gold  and  subsidiary  silver  coins  out  of  circu- 
lation. Apparently  Congress  had  now  come  to  recognize 
the  impossibility  of  national  bimetallism,  for  an  Act  of  1873 
dropped  the  silver  dollar  from  the  coins  of  the  United 
States.  However,  the  discovery  of  rich  silver  deposits  in 
Nevada  and  other  Western  territories  and  states  caused  a 
drop  in  the  price  of  silver  and  by  1878  the  market  ratio 
was  18  to  I.  At  once  there  was  created  a  demand  for  the 
free  coinage  of  silver.  This  demand  came  from  the  owners 
of  silver-mines,  from  debtors  who  wished  to  pay  their 
debts  with  cheaper  money,  but  chiefly  from  those  who  hon- 
estly but  erroneously  thought  bimetallism  could  be  main- 
tained and  that  it  would  be  advantageous  to  the  country. 
A  compromise  between  the  free-silver  advocates  and  the 
supporters  of  the  gold  standard  was  arranged  in  1878. 
This  was  known  as  the  Bland-Allison  Act.  The  terms  of 
this  act  empowered  the  Secretary  of  the  Treasury  to  pur- 
chase for  coinage  purposes  not  less  than  $2,000,000  and 
not  more  than  $4,000,000  worth  of  silver  every  month. 
The  free-silver  men  had  predicted  that  this  would  cause  a 
rise  in  the  price  of  silver,  but  silver  continued  to  fall  in 
value,  as  the  mines  were  producing  increased  quantities. 
The  demands  for  the  free  coinage  of  silver  again  were 
raised  and  again  a  compromise  was  made  by  the  Sherman 


MONEY  187 

Act  of  1890,  which  increased  the  amount  of  silver  pur- 
chases to  4,500,000  ounces  of  silver  a  month  to  be  pur- 
chased at  a  price  not  exceeding  $1  for  371.25  fine  grains. 
This  silver  was  to  be  purchased  by  the  issue  of  treasury 
notes,  which  were  redeemable  in  coin  and  were  full  legal 
tender,  and  the  silver  was  to  be  coined  as  demanded  for 
redemption  of  the  notes. 

The  Sherman  Act  did  not  stop  the  fall  in  the  price  of 
silver,  but  it  did  result  in  a  large  amount  of  gold  going 
abroad.  Large  blocks  of  American  securities  held  in 
Europe  were  sold  in  America  and  the  proceeds  sent  to 
Europe  in  gold,  as  Europe  feared  America  was  about  to 
go  on  a  silver  basis.  The  gold  reserve,  that  is,  the  gold 
held  in  the  Treasury  chiefly  to  redeem  the  greenbacks, 
was  depleted  by  holders  of  greenbacks  demanding  gold. 
Treasury  notes,  issued  under  the  Sherman  Act,  were  in 
the  same  manner  presented  for  redemption  in  gold,  in 
which  coin  they  were  very  properly  redeemed  though  the 
law  authorized  redemption  in  either  gold  or  silver.  A 
commercial  depression  was  coincident  with  the  financial 
unrest  and  some  action  was  necessary  to  relieve  the  situa- 
tion. President  Cleveland  called  a  special  session  of  Con- 
gress in  the  autumn  of  1893  and  reconunended  the  repeal 
of  the  silver-purchase  clause  of  the  Sherman  Act,  which 
repeal  was  accomplished  after  a  bitter  struggle  in  which 
partisan  lines  were  largely  disregarded.  Not  until  the  ad- 
vocates of  free  coinage  of  silver  at  the  ratio  of  16  to  i  were 
defeated  in  two  presidential  campaigns  was  the  United 
States  definitely  placed  upon  a  gold  standard  in  1900. 
The  Act  of  1900  requires  the  Secretary  of  the  Treasury  to 
keep  all  money  of  the  United  States  equal  to  gold. 


i88  THE   ELEMENTS   OF   ECONOMICS 

International  Bimetallism. — We  have  seen  that  national 
bimetallism  is  impossible.  International  bimetallism  has 
some  advocates.  It  is  held  by  them  that  the  great  nations 
of  the  world,  by  adopting  bimetallism  at  any  reasonable 
ratio,  could  maintain  that  ratio  because  of  the  immense 
demand  for  silver  whicli  would  be  created.  Whether  such 
would  be  the  result  is  at  least  doubtful,  and  the  experiment 
is  not  likely  to  be  tried.  The  metallic  money  of  the 
United  States  has  no  superior  in  the  world.  Gold  coins 
of  our  country  are  good  anywhere  in  the  world.  Our  sil- 
ver coins  are  as  good  as  gold  at  home.  Under  these  cir- 
cumstances an  experiment  in  international  bimetallism  has 
no  attraction  for  us. 

Summary. — Barter  is  the  exchange  of  one  article  for 
another.  Barter  is  often  inconvenient  and  money  has 
come  into  general  use.  Money  performs  three  important 
services:  it  is  a  medium  of  exchange,  a  measure  of  value, 
and  a  standard  for  deferred  payments.  Good  money  is 
made  from  metals  that  have  large  value  in  small  compass, 
stability  of  value,  durability,  homogeneity,  and  divisibility. 
Gold  and  silver  possess  these  qualities,  but  gold  to  a  greater 
degree  than  silver.  Free  coinage  is.  the  coinage  of  all 
metal  of  a  certain  kind  that  may  be  presented  at  the  mint 
in  sufificiently  large  quantities.  The  United  States  has 
free  coinage  of  gold.  Gresham's  law  is  that  a  poorer 
money  drives  a  better  money  out  of  circulation.  It  is 
well  illustrated  by  the  history  of  bimetallism  in  the  United 
States.  Token  money,  or  change,  is  issued  in  small  quan- 
tities in  the  United  States.  We  see  token  money  often 
because  of  its  rapidity  of  circulation. 


MONEY  189 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1.  Consult  one  of  the  more  important  histories  of  the  United 

States  for  an  account  of  the  use  of  wampum  and  tobacco  for 
money  in  colonial  times. 

2.  What  are  the  smallest  gold  coins  ever  issued  by  the  United 

States?  Why  are  they  not  now  issued?  What  token 
money  was  once  issued  by  the  United  States  and  then  dis- 
continued? Why  discontinued?  What  would  be  the  ad- 
vantages if  the  United  States  were  to  coin  half -cents? 
What  disadvantages? 

3.  What  should  a  person  do  who  has  received  a  counterfeit  coin 

and  does  not  know  from  whom  it  was  received? 

4.  The  story  is  told  that  a  ferryman  plying  his  trade  on  the  Rio 

Grande  started  the  day  by  entering  a  place  of  refreshment 
and  purchased  a  drink  for  which  he  offered  in  payment  an 
American  dollar  and  received  in  change  a  Mexican  dollar 
which  was  at  that  time  worth  ninety  cents  in  the  United 
States.  Going  to  the  Mexican  side  he  ordered  another  drink 
and  paid  for  it  with  his  Mexican  dollar,  receiving  in  exchange 
an  American  dollar  then  worth  ninety  cents  in  Mexico. 
This  process  was  repeated  each  trip  and  in  the  evening  he 
had  his  original  American  dollar  on  the  American  side  of 
the  river.  Assuming  that  the  story  is  true,  who  paid  for 
the  drinks? 

5.  Read  in  one  of  the  larger  histories  of  the  United  States  in  our 

own  time  about  the  free-silver  campaigns  of  1896  and  1900. 
What  arguments  were  made  for  free  silver?  What  were 
made  against  it? 

6.  Discuss  the  advisability  of  the  United  States  resuming  the 

coinage  of  the  three-cent  and  the  two-cent  piece. 


CHAPTER  XVn 

PAPER  MONEY 

Varieties  of  Paper  Money. — There  are  three  kinds  of 
paper  money:  redeemable,  non-redeeinable,  and  bank- 
notes. The  redeemable  paper  money  is  issued  by  the 
government  of  the  United  States  and  may  be  eitlier  in  the 
form  of  certificates  or  government  notes.  The  certificates 
are  worded  as  follows:    "  This  is  to  certify  that  there  have 

been  deposited  in  the  Treasury  of  the  United  States 

silver  {or  gold)  dollars,  payable  to  bearer  on  demand." 
The  notes  read:    ''  The  United  States  will  pay  to  bearer  on 

demand dollars.^'     Non-redeemable  paper  money  is 

usually  a  promise  to  pay  on  demand  or  at  some  time  in 
the  future.  During  the  Civil  War  the  United  States  issued 
promises  to  pay,  which  are  known  as  Greenbacks,  but  was 
unable  to  meet  its  obligations  until  1879.  Now  all  paper 
money  of  the  United  States  is  redeemable.  Bank-notes 
are  promissory  notes  issued  by  banks.  They  read  as  fol- 
lows: "The  Federal  Reserve  Bank  of  New  York  will  pay 
to  bearer  on  demand dollars." 

Redeemable  Paper  Money. — Redeemable  paper  money 
is  secured  by  gold  and  silver  held  for  that  purpose  in  the 
treasury  of  the  government.  Paper  money  of  this  sort  is 
just  as  good  as  the  metal  for  which  it  may  be  exchanged. 
It  saves  the  wear  and  tear  on  the  metal  and  has  a  con- 
venience  in   use   which  makes   it  preferable   to  metallic 

190 


PAPER   MONEY  191 

money  for  some  purposes.  The  gold  and  silver  certifi- 
cates of  the  United  States  are  examples  of  redeemable 
paper  money. 

It  is  possible  for  a  country  to  issue  notes  in  excess 
of  the  redemption  fund.  There  are  outstanding  about 
$346,000,000  in  greenbacks,  but  the  reserve  fund  is  only 
$150,000,000,  though  the  Secretary  of  the  Treasury  is  re- 
quired to  sell  bonds  to  replenish  the  gold  reserve  whenever 
it  falls  below  $100,000,000.  While  there  is  public  confi- 
dence in  the  currency  of  the  country,  few  greenbacks  are 
presented  for  redemption,  but  they  are  none  the  less  a 
weak  point  in  the  monetary  system  of  the  United  States, 
and  it  would  be  a  wise  policy  to  reduce  them  gradually  to 
$150,000,000  or  to  retire  them  from  circulation. 

Irredeemable  Paper  Money. — Irredeemable  paper  money 
is  merely  a  promise  to  pay.  The  value  of  such  money 
depends  upon  the  credit  of  the  country.  During  the 
Revolutionary  War,  the  Continental  Notes  were  of  so 
little  value  that  the  term  "not  worth  a  continental"  signi- 
fied a  near  approach  to  worthlessness.  The  phrase  ''not 
worth  a  continental  dam,"  signified  not  worth  a  counter- 
feit (damnatus,  or  condemned)  continental  note.  Irre- 
deemable paper  money  has  been  used  chiefly  in  time  of 
war.  To  compel  people  to  accept  it,  it  is  often  made  legal 
tender,  by  which  it  is  made  legally  receivable  for  debts. 

Since  the  government  compels  people  to  take  such 
paper  money,  legal-tender  notes  of  this  sort  are  a  forced 
loan. 

The  United  States  had  an  important  experiment  with 
irredeemable  paper  money  during  the  Civil  War.  The 
first  issue  of  government  notes  during  the  Civil  War  was 


192  THE   ELEMENTS   OF   ECONOMICS 

in  1861,  when  $5o,ooo,cxx)  in  ''demand  notes"  were  issued. 
They  were  not  made  legal  tender,  but  were  receivable  for 
all  payments  due  the  government.  Early  in  1862  a  new 
issue  of  $i5o,ooo,ocx)  in  government  notes  was  placed  in 
circulation.  These  notes  were  legal  tender  and  soon  be- 
came known  as  "greenbacks."  They  had  no  security  back 
of  them  except  the  promise  of  the  United  States.  From 
time  to  time  additional  notes  were  issued  until  a  total  of 
$430,000,000  in  greenbacks  was  in  circulation.  Gold  went 
out  of  circulation  and  prices  rose  with  every  fresh  supply 
of  greenbacks.  A  brisk  speculation  in  gold  was  conducted 
in  the  "gold  room"  in  New  York,  the  value  of  gold  in 
terms  of  greenbacks  fluctuating  not  only  with  the  amount 
of  greenbacks  in  circulation  but  with  general  conditions  in 
the  country  and  especially  with  the  -success  or  failure  of 
the  armies  of  the  United  States  in  the  field  of  battle.     In 

1862  it  took  $1.13  in  greenbacks  to  equal  a  gold  dollar;  in 

1863  the  greenback  equivalent  of  a  gold  dollar  was  $1.45, 
and  in  1864  it  was  $2.03.  Greenbacks  remained  at  a  dis- 
count until  just  before  the  resumption  of  specie  payments 
in  1879.  Greenbacks  were  at  first  thought  to  be  only  a 
temporary  expedient,  and  in  1866  Congress  passed  an  act 
for  their  gradual  retirement,  but  the  act  was  repealed  two 
years  later.  An  act  of  1878  provided  that  there  should  be 
$346,681,000  in  greenbacks  outstanding  and  authorized 
their  re-issue  when  presented  to  the  Treasury.  Since  1900 
they  have  only  been  re-issued  in  exchange  for  gold. 

The  greenbacks  demoralized  the  circulating  medium 
during  the  war,  cost  the  government  vast  sums  of  money 
because  it  sold  bonds  for  which  greenbacks  were  paid  but 
which  were  redeemable  in  gold,  and  created  a  demand  for 


PAPER   MONEY  193 

"cheap  money."  Besides  all  this  the  greenbacks  were 
partly  responsible  for  the  speculative  mania  which  swept 
over  the  country.  There  is  no  need  of  the  issue  of  irre- 
deemable paper  money  by  a  great  country  even  in  time  of 
war.  Napoleon  conducted  one  of  the  greatest  series  of 
wars  without  resort  to  such  an  expedient. 

Fiat  Money. — Irredeemable  paper  money  is  often  known 
as  fiat  money,  because  the  government  says  that  it  is 
money.*  Such  issues  will  circulate  among  people  accus- 
tomed to  the  use  of  paper  money,  especially  if  made  receiv- 
able for  taxes  and  other  government  dues.  It  will,  in 
accordance  with  Gresham's  law,  drive  better  money  out 
of  circulation.  Excessive  issues  of  paper  money  will  cause 
prices  to  rise  and  will  lead  to  a  fictitious  prosperity  for  a 
time.  When  prices  are  rising,  business  men  expand  their 
interests  and  all  seems  well,  but  not  to  creditors  whose 
credits  have  less  purchasing  power  and  not  to  wage- 
earners  and  salaried  employees,  because  their  pay  rises 
more  slowly  than  prices.  The  end  of  inflation  of  the 
currency  is  often  a  panic,  brought  about  by  overspecula- 
tion.  The  remedy  for  inflation  is  deflation,  which  is  a 
painful  though  necessary  process. 

Bank-Notes. — A  large  part  of  the  circulating  medium  of 
most  countries  consists  of  bank-notes.  These  are  promises 
to  pay,  usually  on  demand;  they  are  paid  out  as  money 
by  the  banks  and  circulate  among  the  people  as  money. 
Until  1866  banks  throughout  the  United  States  issued 
bank-notes  under  the  authority  of  the  laws  of  the  several 
states.     Some  states,  notably  New  York,  prescribed  con- 

*  Fiat  is  third  person  singular,  present,  subjunctive,  of  the  Latin  verb 
"fio."     Literal  meaning  is  "let  it  be  done." 


194  THE   ELEMENTS   OF   ECONOMICS 

ditions  which  made  their  bank-notes  as  good  as  gold,  but 
other  states  permitted  banks  to  issue  notes  almost  without 
any  regulation.  The  issues  of  these  ''wildcat  banks"  cir- 
culated at  various  rates  of  discount,  depending  upon  the 
credit  of  the  issuing  bank.  Merchants  were  necessarily 
careful  to  scrutinize  every  note  and  were  obliged  to  con- 
sult a  periodical  issued  for  that  purpose  in  order  to  find 
the  current  quotations  on  notes  of  various  banks. 

The  National  Banking  System. — The  national  banking 
system  of  the  United  States  was  estabHshed  in  1863, 
chiefly  to  provide  a  market  for  United  States  bonds.  The 
National  Banking  Act  has  been  amended  from  time  to 
time,  but  the  essentials  remain  as  in  the  original  act.  As 
the  act  now  stands  the  capital  of  a  national  bank  must 
not  be  less  than  $25,000  in  a  place  of  3,000  population,  and 
the  capital  necessary  for  a  national  bank  increases  with  the 
size  of  the  place  until  it  reaches  $200,000  for  cities  of  more 
than  50,000  population.  These  banks  are  privately  owned, 
and  any  bank  which  conforms  to  the  l^w  may  become  a 
national  bank.  These  banks  may  issue  bank-notes,  which 
are  not  legal  tender,  but  are  receivable  for  taxes,  except 
duties  on  imports,  under  the  following  conditions: 

1.  Each  bank  must  invest  part  of  its  capital  in  bonds 
of  the  United  States. 

2.  By  depositing  bonds  in  the  Treasury  of  the  United 
States,  authority  is  given  to  issue  notes  not  to  exceed  the 
par  value  of  the  bonds.  Should  the  bonds  fall  below  par 
value  the  Comptroller  of  the  Treasury,  who  has  charge  of 
the  administration  of  the  law,  may  require  deposits  of 
additional  bonds. 

3.  There  must  be  deposited  in   the  Treasury  of  the 


PAPER   MONEY  195 

United  States  a  fund  in  gold  equal  to  5  per  cent  of  the  out- 
standing bank-notes  of  the  bank. 

4.     No  bank  may  issue  notes  in  excess  of  its  capital. 

The  national  bank-notes  were  absolutely  safe.  A  pro- 
hibitive tax  of  10  per  cent  put  out  of  existence  the  bank- 
notes of  state  banks. 

Elastic  Currency. — Elastic  currency  is  currency  that  ex- 
pands and  contracts  in  volume  with  varying  demand  for 
money.  In  the  autumn  there  is  always  an  increased 
demand  for  money  on  account  of  the  movement  of  the 
crops.  Western  banks,  which  have  deposited  a  part  of 
their  reserves  in  New  York  and  Chicago,  call  for  a  return 
of  these  deposits  in  the  autumn  when  they  are  needed  at 
home.  The  Eastern  banks  need  no  less  currency  in  the 
autumn,  and  unless  the  currency  is  elastic  a  stringency  in 
the  money  market  develops  every  autumn.  In  times  of 
financial  panic  the  need  of  an  elastic  currency  is  even  more 
pronounced.  Ordinary  commercial  instruments  of  credit, 
by  means  of  which  in  normal  tim6s  a  vast  amount  of  busi- 
ness is  done,  become  acceptable  with  more  and  more  diffi- 
culty as  a  panic  grows  and  at  last  ma}'  be  refused.  At 
such  times  people  demand  "real  money,"  and  the  collapse 
of  credit  results  in  a  demand  for  additional  currency. 

The  national  bank  notes  were  inelastic.  The  first  step 
toward  giving  an  elastic  currency  was  taken  in  1908  when 
the  Aldrich-Vreeland  Act  authorized  issues  of  notes  by 
national  banks  upon  other  securities  than  United  States 
bonds.  The  notes  thus  issued  were  taxed  at  the  rate  of 
5  per  cent  a  month  for  the  first  month,  the  tax  increasing 
I  per  cent  a  month  until  a  maximum  of  10  per  cent  was 
reached.     As   the  rate   of  interest  on  money  rises  with. 


196  THE   ELEMENTS   OF   ECONOMICS 

stringency  in  the  money  market,  the  Aldrich-Vreeland  Act 
would  tend  to  relieve  the  situation  in  a  panic,  but  it  would 
not  take  effect  until  the  situation  was  already  bad. 

The  Federal  Reserve  System. — The  Federal  Reserve 
Act  of  1 91 3  gave  the  United  States  a  new  banking  system. 

The  Federal  Reserve  Board  is  the  directing  head  of  the 
system.  This  board  consists  of  seven  members,  five  ap- 
pointed by  the  President  of  the  United  States  and  two 
ex-of!icio  members:  the  Secretary  of  the  Treasury  and 
the  Comptroller  of  the  Treasury.  The  country  is  divided 
into  twelve  districts  and  there  is  a  Federal  Reserve  Bank 
in  each  district.  These  banks  are  now  in  New  York, 
Boston,  Philadelphia,  Richmond,  Atlanta,  Cleveland, 
Chicago,  Minneapolis,  St.  Louis,  Kansas  City,  Dallas,  and 
San  Francisco.  The  stock  of  the  Federal  Reserve  Banks 
is  all  held  by  other  banks  and  they  have  no  direct  dealings 
with  the  public;  they  are  banks  which  deal  only  with 
banks.  Every  national  bank  is  required  to  be  a  member 
bank.  This  it  may  become  by  subscribing  to  stock  of  the 
Federal  Reserve  Bank  in  its  section  equal  in  amount  to 
6  per  cent  of  its  capital  and  surplus.  Trust  companies 
and  state  banks  may  become  member  banks  if  they  so 
desire  and  if  they  meet  the  prescribed  conditions. 

Issues  of  Currency  by  Federal  Reserve  Banks. — There 
are  two  kinds  of  currency  which  may  be  issued  by  Federal 
Reserve  Banks:  Federal  Reserve  Bank  Notes  and  Federal 
Reserve  Notes. 

I.  Federal  Reserve  Bank  notes.  These  notes  are  very 
similar  to  national  bank  notes.  National  banks  are  author- 
ized to  sell  the  bonds  which  are  security  for  their  national 
bank  notes  to  a  Federal  Reserve  Bank.    The  national 


PAPER    MONEY  197 

bank  notes  will  then  be  retired,  and  the  Federal  Reserve 
Bank  will  hold  these  bonds  as  security,  and  issue  Federal 
Reserve  Bank  notes.  It  is  expected  that  Federal  Reserve 
Bank  notes  will  gradually  replace  national  bank  notes. 

2.  Federal  Reserve  notes.  Much  more  important  than 
Federal  Reserve  Bank  notes  are  Federal  Reserve  notes. 
Federal  Reserve  notes  may  be  issued  upon  the  security 
either  of  gold  or  commercial  paper  deposited  by  a  mem- 
ber bank  in  a  Federal  Reserve  Bank.  In  each  case  the 
security  is  held  by  the  Federal  Reserve  Bank,  which  sends 
to  the  member  bank  the  Federal  Reserve  notes,  and  these 
are  put  into  circulation  the  same  as  any  other  money. 
Notes  secured  by  gold  are  secured  dollar  for  dollar,  thus 
making  them  similar  to  gold  certificates.  A  reserve  of  40 
per  cent  in  gold  is  required  for  notes  secured  by  commer- 
cial paper,  though  the  law  permits  this  reserve  to  be 
waived  by  consent  of  the  Federal  Reserve  Board.  It  will 
be  noted  that  additional  currency  can  readily  be  secured 
whenever  necessity  arises;  this  is  one  of  the  strong  features 
of  the  Federal  Reserve  Banking  Act.  An  issuing  bank 
may  redeem  Federal  Reserve  notes,  but  no  Federal  Re- 
serve Bank  may  pay  out  notes  of  another  Federal  Reserve 
Bank,  but  must  return  them  for  credit  or  redemption. 
Federal  Reserve  notes  are  virtually  guaranteed  by  the 
United  States. 

Money  in  Circulation  in  the  United  States. — The  table 
on  page  198  shows  the  various  kinds  of  money  in  the 
United  States  on  February  i,  192 1. 

This  table  shows  that  most  of  the  metallic  money  of  the 
United  States  is  in  the  form  of  gold  coin.  Most  of  it  is 
held  as  reserve  by  the  banks  and  as  a  redemption  fund  for 


1 98 


THE   ELEMENTS   OF  ECONOMICS 


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PAPER   MONEY  199 

gold  certificates.  The  people  of  the  United  States  prefer 
paper  money  to  gold,  so  long  as  the  paper  money  is  as  good 
as  gold,  and  not  much  gold  is  used  in  ordinary  business. 

It  should  be  noticed  that  Federal  Reserve  notes  have 
become  the  principal  paper  money  of  the  United  States,, 
although  a  considerable  volume  of  national  bank  notes  is 
still  in  circulation. 

Summary. — Paper  money  is  of  three  kinds:  redeem- 
able, non-rfedeemable,  and  bank-notes.  These  look  very 
similar,  but  are  worded  differently.  The  United  States 
now  has  no  non-redeemable  paper  money.  During  the 
Revolutionary  and  Civil  Wars  our  experience  with  paper 
money  was  such  that  we  are  not  likely  to  repeat  it.  Bank- 
notes are  issued  by  national  banks  aind  by  Federal  Reserve 
Banks.  The  Federal  Reserve  notes  are  designed  to  give 
us  an  elastic  currency,  that  is,  a  currency  which  rises  and 
falls  to  meet  the  conditions  of  demand.  All  the  money  of 
the  United  States  is  as  good  as  gold. 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1.  What  paper  money  in  less  denominations  than  one  dollar  has 

the  United  States  issued?     Under  what  circumstances  was 
this  money  issued? 

2.  Give  a  history  of  issues  of  paper  money  during  the  Civil  War. 

3.  Investigate  the  experience  of  the  Confederate  States  of  America 

in  reference  to  paper  money. 

4.  Compare  the  National  Bank  notes  and  the  Federal  Reserve 

notes. 

5.  Get  the  opinion  of  a  business  man,  a  lawyer,  and  a  banker  on 

the  Federal  Reserve  notes. 


CHAPTER  XVIII 
MONEY  AND  PRICES 

The  Quantity  Theory  of  Prices. — ^According  to  the  quan- 
tity theory,  prices  vary  directly  with  the  amount  of  money 
in  circulation.  An  increase  in  the  volume  of  money  will 
raise  prices,  a  decrease  will  lower  prices.  This  theory  is 
accepted  with  the  modification  that  other  things  being 
*equal,  it  is  true.  Rapidity  of  circulation  is  an  item  to  be 
•considered.  Two  countries  may  have  the  same  amount  of 
money  in  circulation  and  there  may  be  the  same  number 
of  exchanges  to  be  made,  but  if  the  money  of  one  country 
circulates  more  rapidly  than  that  of  the  other,  it  is  doing 
more  work,  which  is  equivalent  to  its  having  a  larger 
amount  of  money  and  has  the  same  effect  on  prices.  In- 
struments of  credit,  like  checks  and  drafts,  may  also  take 
the  place  of  money  to  a  greater  extent  in  one  country  than 
another  and  in  the  same  country  at  different  times. 

Effects  of  Changes  in  the  Volume  of  Currency. — ^Any 
changes  in  the  amount  of  money  in  circulation  will  be 
reflected  in  prices.  Inflation  inflicts  an  injury  on  creditors, 
as  debts  can  be  paid  in  less  purchasing  power  and  con- 
traction injures  the  debtors.  Inflation  tends  to  promote 
speculation  and  gives  rise  to  a  fictitious  prosperity  for  a 
time.  With  prices  rising  there  is  a  rush  to  buy  and  to 
manufacture,  but  this  leads  to  overproduction  in  some 
lines  of  goods  and  a  reaction  must  come,  which  frequently 
results  in  a  panic.  Inflation  seriously  affects  the  purchas- 
ing power  of  returns  from  investments  as  well  as  pensions 


MONEY   AND    PRICES 


and  insurance.  If  all  prices  were  to  rise  with  the  same 
degree  of  celerity,  less  harm  would  be  done,  but  prices  do 
not  rise  uniformly.  Prices  of  goods  rise  quickly,  then 
profits  and  rents  rise,  but  wages  and  salaries  lag  behind. 

Contraction,  or  deflation  of  the  currency,  leads  to  a 
slowing  down  of  industry  and  a  difficulty  in  securing 
credit.  It  works  harm  to  the  debtor  classes  as  they  must 
pay  more  in  purchasing  power  than  they  received  when 
their  debts  were  contracted. 

The  Multiple  Standard. — To  enable  debts  to  be  paid 
with  equal  purchasing  power,  despite  changes  in  the  value 
of  money,  several  plans  have  been  suggested.  The  sim- 
plest of  these  is  a  multiple  standard.  If  a  number  of 
articles  in  common  use  be  selected  and  their  prices  ten 
years  ago  be  found  and  compared  with  their  prices  now, 
it  would  be  easy  to  show  how  much  money  would  now  be 
required  to  equal  the  purchasing  power  of  a  certain  amount 
of  money  ten  years  ago. 

The  following  table  illustrates  the  principle  of  the  mul- 
tiple standard: 

I  ton  coal 

I  suit  woolen  clothing 
I  bushel  wheat 
I  bushel  potatoes 
I  stove 
I  table 

loo  miles  transportation 
Ordinary  amusements  for 
one  month 


Goods  which  $ioo 
would  purchase 
in  igio 


To  purchase  similar 
goods   in    1920, 
about  $250  would 
be  required. 


Inflation  and  Contraction. — There  are  several  ways  in 
which  the  amount  of  money  may  be  so  increased  as  to  be 
considered  inflation  of  the  circulating  medium.  Even 
though  a  country  be  on  a  gold  standard,  it  is  possible  that 


202 


THE  ELEMENTS  OF  ECONOMICS 


the  opening  of  new  and  rich  gold  mines  may  lead  to  a 
rapid  increase  in  the  number  of  gold- coins  and  consequently 
a  rise  in  prices.  Such  a  condition  actually  occurred  when 
the  mines  in  California  and  Australia  were  first  opened. 
Such  an  inflation  seldom  lasts  long,  as  the  richer  veins  are 
soon  exhausted  and  the  expense  of  production  returns  to 
the  old  level.  There  may  be  inflation  of  metallic  money 
in  case  the  coin  value  is  less  than  the  metallic  value  and 
such  money  is  coined  in  large  quantities,  and  the  inflation 
of  paper  money  is  familiar  to  all. 

Contraction  is  the  opposite  of  inflation.  Contraction  of 
gold  coins  might  be  caused  by  a  failure  of  the  mines  to 
produce  the  amount  of  gold  needed.  Contraction  in  paper 
money  may  be  the  result  of  the  withdrawal  of  some  of  the 
paper  money  from  circulation. 

Index  Numbers. — Changes  in  prices  may  be  indicated 
by  index  numbers.  Index  numbers  may  be  found  in  a 
very  simple  way.  The  prices  for  any  given  time  may  be 
taken  as  base  prices  and  changes  in  prices  reckoned  in  rela- 
tion to  base  prices.  For  example,  take  a  ton  of  iron,  a 
pound  of  cotton,  a  bushel  of  potatoes,  and  a  bushel  of 
wheat. 


Article 

Base  Price 

Sept.  I, 

1920 

Base 

Price, 
1930 

Percentage 

of  1920 

base 

One  ton  iron 

One  pound  cotton 

One  bushel  potatoes 

One  bushel  wheat 

$50 
.  20 
1.50 

2.75 

100 
100 
100 
100 

$25 
.10 

1.50 
'1. 00 

50 

100 
36.36 

Average 

4CX) 
100 

236.36 
59.09 

MONEY   AND   PRICES  203 

Assuming  tnat  prices  in  1930  will  be  as  given  in  the 
above  table,  the  index  number  for  1920  would  be  400  and 
for  1930,  297;  or,  reducing  each  to  an  arithmetic  mean,  the 
index  number  for  1920  would  be  100  and  for  1930,  59.09. 

The  best-known  index  numbers  for  the  United  States 
are  those  of  the  United  States  Bureau  of  Labor,  which  are 
based  upon  the  wholesale  prices  of  240  commodities.  The 
rise  of  prices  from  19 14  to  1920  is  indicated  by  the  following 
table: 

Year  Index  Number 

1914  100 

1915  lOI 

19 16  124 

1917  176 

1918  196 

1919  212 

It  should  not  be  assumed  that  increase  in  prices  has 
been  wholly  due  to  inflation  of  the  currency.  Other  fac- 
tors such  as  inefficiency  of  labor,  profiteering,  and  the  in- 
crease in  taxation  have  also  had  their  influence. 

The  Stabilized  Dollar. — Professor  Irving  Fisher,  the 
eminent  economist  of  Yale  University,  has  proposed  a 
plan  for  *' stabilizing  the  dollar"  by  abandoning  the  present 
standard  gold  dollar  and  substituting  for  it  a  paper  dollar 
redeemable  in  gold  but  in  a  varying  quantity  of  gold,  the 
amount  being  so  regulated  as  to  keep  the  purchasing  power 
of  the  dollar  as  nearly  constant  as  possible.  When  prices 
rise,  as  indicated  by  index  numbers,  the  dollar  would  be 
redeemable  in  a  greater  quantity  of  gold,  thus  bringing 
prices  down;  when  prices  fall  the  gold  in  exchange  for  the 
paper  dollar  would  be  decreased  so  as  to  raise  prices. 

Economists  differ  in  regard  to  the  probable  efficiency  of 


204  THE   ELEMENTS   OF   ECONOMICS 

Professor  Fisher's  proposal.  The  general  impression  seems 
to  be  that  it  would  work  well  in  normal  times,  but  would 
prove  an  injury  in  times  of  panic  or  war.  The  plan  could 
hardly  be  put  into  effect  by  one  nation,  as  it  would  seriously 
disturb  foreign  exchanges  in  times  of  financial  stress  and, 
as  explained  by  Doctor  B.  M.  Anderson,*  even  if  the  plan 
were  adopted  by  an  international  agreement,  the  index 
number  might,  in  times  of  rapid  changes  in  prices,  have  so 
different  a  relation  to  the  scale  of  prices  in  one  country  as 
compared  to  another  as  to  cause  confusion  in  exchanges 
and  general  dissatisfaction.  To  adopt  such  a  plan  when 
prices  are  abnormally  high  would  be,  in  Doctor  Anderson's 
opinion,  ''to  perpetuate  all  the  suffering  of  people  on  fixed 
incomes." 

Summary. — Other  things  being  equal,  prices  will  rise  and 
fall  with  an  increase  or  decrease  in  the  amount  of  money 
in  circulation.  An  increase  in  the  amount  of  money  suffi- 
cient to  raise  prices  very  much  is  called  inflation  of  the 
currency.  A  material  decrease  in  the  volume  of  money  is 
deflation,  or  contraction.  Multiple  standards  and  index 
numbers  are  methods  whereby  changes  in  the  purchasing 
value  of  money  may  be  measured.  Professor  Fisher  has 
proposed  a  ''stabilized  dollar,"  or  a  dollar  redeemable  in 
different  quantities  of  gold,  the  amount  depending  upon 
the  purchasing  power  of  gold  at  the  time  of  redemption. 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

I.     How  do  increases  in  the  amount  of  money  affect  salaries? 

Have  salaries  of  teachers  risen  as  rapidly  as  has  the  cost  of 

living  ? 

*  The  Fallacy  of  the  Stabilized  Dollar.  Published  by  the  Chase  National 
Bank  of  New  York. 


MONEY   AND    PRICES  205 

2.  What  class  of  persons  benefited  from  the  rise  in  prices  during 

the  war?     What  class  of  persons  were  injured? 

3.  What  causes  other  than  changes  in  the  volume  of  currency 

affect  prices  ?     What  is  the  tendency  of  prices  now  ?     Why  ? 

4.  Make  an  investigation  of  index  numbers.     References:     Ely, 

Outlines  of  Economics,  pp.  337-343;  Fisher,  Elementary  Prin- 
ciples of  Economics,  pp.  247-257;  Taussig,  Principles  of 
Economics,  vol.  I,  pp.  291-293,  441. 

5.  Get  the  opinion  of  a  banker  or  business  man  on  Professor 

Fisher's  plan  for  a  stabilized  dollar. 


CHAPTER  XIX 
BANKING  AND  CREDIT 

The  Banking  Functions. — There  are  three  major  services 
performed  by  banks: 

1.  Deposit. 

2.  Discount  and  loan. 

3.  Issue.* 

Many  minor  functions  are  incidental  to  the  banking 
business,  such  as  the  collection  of  checks,  notes,  bills  of 
exchange  and  drafts,  the  buying  and  selling  of  securities, 
the  renting  of  safe-deposit  boxes  and  vaults,  and  the  per- 
forming of  many  services  of  a  fiduciary  or  commercial 
nature.  The  incidental  functions  of  banks,  many  of  which 
produce  no  revenue  for  the  banks,  are  i](iatters  which  cause 
the  most  expense  in  time  and  labor. 

"Interest  upon  loans  and  investments  is  the  bank's  chief 
source  of  income,  although  the  clerical  work  involved  in 
the  making  of  loans  and  discounts  is  in  very  small  pro- 
portion compared  with  the  tremendous  outlay  of  time, 
labor,  and  overhead  expense  met  with  in  providing  services 
which  will  attract  depositors.  Thus  it  happens  that  the 
bank,  viewed  as  a  workshop  or  counting-house,  may  pre- 
sent a  figure  of  extreme  industry  not  in  any  way  related  to 
the  earning  power  of  the  bank's  resources.  Between  75  per 
cent  and  90  per  cent  of  the  accounting  work  of  a  commer- 
cial bank  grows  out  of  the  services  which  the  bank  renders 

*  See  Chapter  XVIII,  pp.  193-197. 
206 


BANKING   AND    CREDIT  207 

its  depositors,  the  bank  rarely  receiving  any  fee  by  way  of 
payment,  but  looking  to  the  income  derived  from  the 
deposits  for  reimbursements  and  profit."  * 

Not  all  banks  perform  all  the  possible  banking  func- 
tions. The  function  of  issue,  described  in  a  previous  chap- 
ter, is  confined  in  the  United  States  to  banks  associated 
in  the  Federal  Reserve  banking  system  and  such  incidental 
functions  as  the  safe-keeping  of  valuables  and  acting  as 
trustee  for  estates,  etc.,  are  not  performed  by  many  banks. 

The  Deposit  Function. — The  deposit  function  needs  little 
explanation.  It  is  obviously  of  advantage  to  one  who  has 
more  money  than  he  immediately  needs  to  deposit  it  in  a 
bank  for  safe-kejeping,  even  should  the  bank  pay  no  interest. 
It  is  also  advantageous  to  society  that  this  be  done,  as 
deposits  concentrated  in  a  bank  can  be  put  to  work,  while 
if  scattered  among  thousands  of  small  holders  employment 
for  them  is  not  so  easy  and  the  chance  of  loss  is  vastly 
greater. 

Loans  and  Discounts. — The  deposits  in  a  bank  at  one 
time  may  amount  to  $400,000  and  at  another  time  may 
fall  to  $340,000,  but  the  experience  of  the  bank  may  show 
that  the  deposits  never  fall  below  $340,000.  It  is  clear 
that  the  bank  may  loan  a  large  part  of  its  deposits  to 
its  customers,  only  being  sure  that  its  depositors  may 
receive  their  money  on  demand.  In  addition  to  the  de- 
posits, the  bank  may  lend  its  own  funds  or  credit.  A  per- 
son coming  to  a  bank  to  borrow  may  secure  funds  or  credit, 
on  his  own  note,  usually  indorsed  by  a  second  person, 
payable  at  some  specified  future  time,  usually  not  over 
three  months.     Funds  may  be  secured  without  the  in- 

*  Wolfe,  Practical  Banking,  p.  22. 


2o8  THE   ELEMENTS   OF   ECONOMICS 


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tJUfi  uiIcuaI  at j&j(. p«r  annom,  fia<!i<i«  a«po«4t«3  wlitll  taiA  sBonl  a*  cofloieuif  *««»•<«    ^ 

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100  shares  i.  xi.H.     Conmon 


with  such  addition*!  oollatenls  as  may  from  time  to  time  be  required  by  any  of  the  Officers  of  said  Bank,  and  which 
—J — hereby  promise  to  furnish  on  demand.  If  these  required  collaterals  be  not  so  given  upon  demand,  then  this 
note  shall  become  due  and  payable.     And  -■! hereby  give  to  said  Bank,  or  its  assigns,  full  power  to  sell,  as- 


aigp  and  deliver  the  whole  or  any  part  of  said  collaterals,  or  any  substitutes  therefor,  or  any  additions  thereto,  at  any 
ftokers'  Board  or  at  the  New  York  Produce  Exchange  or  elsewhere  at  public  o.r  private  sale,  at  the  option  of  such 
holder,  on  the  non-performance  af  any  of  the  promises  herein  contained,  and  withoutnoticeof  amount  due  or  claim- 


ed to  be  due,  without  demand  of  payment,  without  advertisement  and  without  notice  of  the  time  or  place  of  sale, 
each  and  every  of 'whirii  is  hereby'ezpressly  waived ;  vai  on  any  such  sale  the  Bank,  its  assign  or  any  of  the  Offi- 
cers of  said  Bank  may  purchase. 

It  is  Fuktbkr  Aobked,  that  any  surplus  arising  from  the  sale  of  said  eollaterals,  beyond  the  amount  due 


hereon,  shall  be  applicable  upon  any  other  note  or  claim  of  the  said  Bank  arising  directly  or  by  assignment  against 
..Re fx  the  time  of  said  sale,  whether  the  same  be  then  due  or  not  due. 

And  it  is  Fvbtbeb  Aghekd,  that  any  moneys  or  properties,  at  any  time  in  the  possession  of  The  Nassau 
National  Bank  belonging  to  any  of  the  parties  liable  hereon  to  said  Bank,  and  any  deposits,  balance  of  deposits  or 
other  sums  at  any  time  credited  by  or  due  from  said  Bank  to  any  of  said  parties,  shall  at  all  limes  be  held  and 
treated  as  collateral  security  for  the  payment  of  this  note  or  the  indebtedness  evidenced  hereby,  whether  due  or  not 
due,  and  said  Bank  faiay  at  any  time,  at  its  option,  set  off  the  amount  due  or  to  become  due  hereon  against  any 
claim  of  any  of  said  parties  against  said  Bank. 

AMD  rr  IS  FvKTHSB  AoREKD,  that  upon  the  non-performance  of  any  -of  the  promises  herein  contained,  thai 
any  and  all  notes  or  claims  held  by  the  said  Bank  at  such  time  and  arising  directly  or  by  assignment  against  .ma  . 
shall  immediately  become  due  and  payable. 

It  is  also  Aorked,  that  said  collaterals  may  from  time  to  time,  by  mutual  consent,  be  exchanged  for  others, 
which  shall  also  be  held  by  said  Bank  on  the  terms  above  set  forth,  and  may  be  applied  to  any  other  obligation 
now  or  hereafter  to  be  incurred  by — .BM to  said  Bank,  whether  due  or  to  become  due. 

_.^r<24!«'«>^  <?S^^. 

3.i.CcKr.t..at,..Br.ooklya.j...X, , 

A  PROMISSORY  NOTE  SECURED  BY  COLLATERAL 


dorsement  of  a  second  person  by  the  deposit  of  acceptable 
securities  which  will  be  held  by  the  bank  until  the  loan  is 
paid  and  which  may  be  sold  to  satisfy  the  loan  if  not  re- 
paid when  it  becomes  due.  These  loans  are  known  as 
collateral  loans. 

In  most  cases  the  borrower  does  not  want  money,  but 


BANKING   AND    CREDIT  209 

wants  a  checking  account  to  the  amount  of  the  loan,  and 
in  these  cases  no  money  passes;  the  bank  has  merely  loaned 
its  credit.  A  bank  does  not  act  as  a  depositor's  agent  in 
making  a  loan;  it  assumes  the  role  of  principal,  and  if  the 
loan  is  not  repaid  the  loss  must  be  borne  by  the  bank. 

Bankers  make  a  distinction  between  loans  and  discounts. 
A  discount  is  a  loan  upon  which  interest  is  collected  in 
advance.  Discounts  have  a  fixed  date  of  maturity  and  a 
fixed  rate  of  interest.  Loans  are  often  payable  on  demand 
and  the  interest  is  collected  when  the  loan  is  paid. 

Bank  Reserves. — Ordinary  bank  deposits  are  payable  on 
demand  and  hence  a  bank  must  keep  on  hand  sufficient 
cash  to  meet  probable  demands.  In  a  community  in 
which  comparatively  Httle  banking  is  done  and  deposits 
are  left  intact  for  long  periods,  a  small  reserve  will  be 
sufficient;  in  more  active  banking  centres  larger  reserves 
are  necessary.  Reserves  held  against  deposits  should  not 
be  confused  with  reserves  against  Federal  Reserve  notes 
which  are  discussed  in  a  previous  chapter.  The  cash 
reserves  held  against  deposits  required  by  law  vary  from 
12  }4  per  cent  to  25  per  cent,  depending  upon  location  and 
whether  they  are  state  or  national  banks.  It  is  estimated 
that  for  the  whole  United  States  one-fifth  of  the  deposits 
are  held  as  reserves.  Obviously  the  larger  the  amount 
held  as  reserves,  the  less  there  is  for  the  bank  to  loan. 
Banks  regulate  their  reserves  by  changing  the  rate  of  in- 
terest on  loans.  If  deposits  are  increasing  more  rapidly 
than  loans,  the  latter  may  be  stimulated  by  lowering  the 
rate  of  interest  and  thus  encouraging  loans.  In  order  that . 
the  proper  relation  between  reserves  and  deposits  may  be 
maintained  the  assets  of  a  bank  must  be  as  fluid  as  pos- 


2IO  THE   ELEMENTS   OF  ECONOMICS 

sible.  Loans  are  usually  made  for  thirty,  sixty,  or  ninety 
days,  so  that  obligations  to  the  bank  are  daily  coming 
due  and  a  constant  stream  of  funds  is  flowing  into  the 
bank. 

Kinds  of  Banks.— There  are  many  kinds  of  banks  in  the 
United  States.  National  banks  are  organized  under  the 
terms  of  the  National  Banking  Act.  Each  national  bank 
must  make  a  statement  of  its  condition  to  the  comptroller 
of  the  currency  five  times  a  year  and  must  be  examined 
as  to  its  condition  by  the  Federal  bank  examiners  twice  a 
year  without  notice  being  given  of  the  time  of  examina- 
tion. State  banks  are  organized  under  state  laws  and  are 
subject  to  examination  by  bank  examiners  of  the  state 
banking  department. 

State  banks  often  have  a  trust  department,  in  which 
case  they  are  generally  called  trust  companies.  Trust 
companies,  in  addition  to  doing  a  general  banking  busi- 
ness, are  authorized  by  law  to  act  as  trustees  for  estates, 
executors  of  wills,  and  to  administer  other  trust  funds. 
Savings-banks  are  organized  under  state  laws  and  are  es- 
pecially designed  to  receive  the  deposits  of  those  who  can 
save  in  only  small  amounts.  They  are  usually  restricted 
to  giving  interest  on  sums  less  than  $5,000  and  do  not,  as 
a  rule,  allow  checking  accounts.  The  laws  safe-guarding 
deposits  in  savings-banks  are  more  strict  than  in  other 
banks. 

A  considerable  number  of  private  banks  exist  in  the 
United  States.  These  are  conducted  by  individuals  or 
partnerships  and  are  generally  subject  to  examination  by 
the  state  banking  departments.  Most  private  banks 
doing  a  commercial  business  are  in  small  communities, 


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I 


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212  THE   ELEMENTS   OF   ECONOMICS 

which  have  been  long  established  and  which  do  an  exten- 
sive business,  though  most  private  banks  in  large  cities 
do  not  engage  in  commercial  banking,  but  confine  them- 
selves to  dealing  in  stocks  and  bonds  and  foreign  and 
domestic  exchange. 

What  is  Credit? — Credit  may  be  defined  as  present  pur- 
chasing power,  transferred  from  lender  to  borrower.  Some 
instruments  of  credit,  like  bank-notes  and  government 
notes,  are  virtually  the  same  as  money,  but  other  instru- 
ments of  credit,  like  promissory  notes,  checks,  drafts,  bills 
of  exchange,  and  the  like,  cannot  be  classified  as  money, 
yet  through  their  use  many  exchanges  of  goods  and  pay- 
ments for  services  are  made.  There  are  in  the  United 
States  more  than  $20,000,000,000  of  bank  deposits  and  less 
than  one-fourth  that  amount  in  money.  Through  the  ex- 
change of  bank  deposits  a  vast  number  of  transactions  are 
effected.  Depositors  do  not  usually  want  money  when 
they  draw  on  their  accounts;  they  want  purchasing  power, 
and  this  they  can  obtain  in  instruments  .of  credit. 

Promissory  Notes. — A  promissory  note  is  a  promise  to 
pay  a  specified  sum  of  money  on  demand  or  at  some  time 
stated  in  the  note.  Promissory  notes  may  be  *' single- 
name"  or  '^ double-name"  notes,  depending  on  whether 
they  are  signed  by  one  person  or  signed  or  indorsed  by  an 
additional  person.  Banks,  as  a  rule,  require  two-name 
paper.  The  value  of  a  promissory  note  depends  on  the 
debtor's  willingness  and  ability  to  meet  his  obligations. 
Promissory  notes  may  be  given  in  exchange  for  goods. 
The  holder  of  a  promissory  note  may  make  it  payable  to 
another  person  and  use  it  for  paying  his  debts  or  may  sell 
it  to  a  bank  or  other  dealer  in  credit. 


BANKING   AND    CREDIT  213 

Book-Accounts.  —  Book-accounts  are  records  on  the 
books  of  a  creditor  of  goods  or  services  bought  on  credit. 
Many  goods  are  bought  on  thirty,  sixty,  or  ninety  days' 
credit.  Book-accounts  are  not  often  sold,  but  are  not 
infrequently  used  as  security  upon  which  to  borrow  money. 

Acceptances. — Trade  acceptances  are  drafts  which  have 
been  made  by  the  seller  of  goods  upon  the  purchaser  and 


I 


No.     61 


To      John  j)oe     ' 

16  Newicirlc 

Hawark.   H. 


|'|t\pE  [acceptance 

\ofi^  N.  L  Jpn*  9th i9Zi_  ^1.000.00     _ 

.A/t^-^^iM pay  to  tktordet  19   OURSELVES 

Dollars. 


The  Migation  Wthe'^  ccepw  ha%of  amts  out  tif  the  pttrchase  of  goods  from  the 


^ 


/Ue£a>z^  ^jQe 


t        \       \        i  31  Court  St. 

Due    Jvly..lth a_iJLgiJ       <»  ^roolclyn.  M.Y. 


A  trade  acceptance  is  an  obligation  of  the  acceptor  to  pay.  The  drawer  is 
secondarily  responsible.  A  trade  acceptance  is  therefore  two-name  commercial 
paper. 

which  he  has  agreed  to  pay.  Acceptances  have  practically 
done  away  with  book-accounts  as  instruments  of  credit. 
They  are  short-term  instruments  and  are  legal  evidences 
of  the  debt.  They  can  therefore  be  readily  converted  into 
cash,  if  accepted  by  responsible  merchants,  and  are  espe- 
cially desirable  as  the  Federal  Reserve  Banking  Act  permits 
Federal  Reserve  notes  to  be  issued  on  approved  short-time 
commercial  paper.* 

*  Acceptances  are  described  as  follows  in  Ettinger  and  Golieb,  Credits 
and  Collections,  pp.  20,  21. 

"A  domestic  bill-of-exchange  is  commonly  known  as  a  commercial  draft. 
It  usually  originates  in  the  sale  of  goods,  the  seller  ordering  the  purchaser 
to  pay  either  himself  or  another  who  will  collect.     The  payee  of  the  draft, 


214  THE   ELEMENTS   OF   ECONOMICS 

Bonds. — Bonds  are  promises  to  pay  a  specified  sum  of 
money  at  some  time  in  the  future,  usually  ten  years  or 
more.  They  are  used  to  secure  capital  needed  for  a  term 
of  years,  while  promissory  notes  are  usually  employed  for 
short-term  loans. 


M        Paris.   France..      June  9th,    1921 

Ninety  day-j  "^^  ''///^ /'         date  /fry//' 

i......        £  * 


Ten   tncv.s<j,nd     Francs,  g"     f;         .^  '  ^-^-^^rf^ 


JXtUi  iUilk^ 


^'^i^^^St^^  tS^^ 


A  B.\NK  ACCEPTANXE 
When  "accepted"  by  the  bank  it  becomes  an  obligation  of  the  bank. 

Checks. — A  check  may  be  defined  as  a  written  order 
upon  a  bank  authorizing  the  payment  of  a  specified  sum 
of  money  to  an  individual  or  a  corporation  or  to  the  bearer. 
A  check  may  be  drawn  against  a  deposit  of  money  or 
against  a  credit  established  in  the  bank.  A  majority  of 
large  payments  are  made  by  checks  without  the  use  of 

if  it  is  a  demand  draft,  will  cause  it  to  be  presented  to  the  drawee,  the 
person  upon  whom  it  is  drawn,  for  payment.  If  the  seller  wishes  to  give 
the  purchaser  thirty  or  sixty  days  to  pay,  he  will  draw  a  draft  payable  at 
thirty  or  sixty  days  after  sight  or  at  some  definite  time  in  the  future.  The 
payee  will  then  immediately  cause  the  draft  to  be  presented  to  the  drawee, 
and  the  drawee  will  accept  the  draft  by  writing  across  the  face  of  the  draft 
'accepted.'  When  the  drawee  'accepts'  the  draft  it  becomes  his  promis- 
sory note  and  the  drawer  remains  secondarily  responsible  as  endorser.  The 
accepted  draft  or,  as  it  is  called,  the  'acceptance,'  may  then  be  sold  to  or 
discounted  at  a  banking  institution." 


BANKING   AND    CREDIT  215 

money.  Thus  A  may  owe  B  $100,  B  may  owe  C  $100,  and 
C  may  owe  D  $100.  A  gives  his  check  for  $100  to  B,  B 
draws  a  check  for  $100  in  favor  of  C,  and  C  pays  Z>  $100 
by  check.  Assuming  that  all  the  accounts  are  in  one 
bank,  the  entire  series  of  payments  is  made  without  the 
use  of  money.  A's  account  is  reduced  by  $100  and  D's 
is  increased  by  $100.  The  other  accounts  balance  one 
another,  and  the  whole  affair  is  merely  a  matter  of  chang- 
ing book-accounts. 

Certified  Checks. — ^A  certified  check  is  one  which  a  bank 
guarantees  to  pay.     When  a  check  is  presented  for  cer- 


HAMII.T< 


Jh^^ 


j^j^ 


^^-^^f.^ 


'mm.  • ';  .  ^   ,  f(>t^i^S.^A^MJipjC 


This  is  a  reproduction  of  a  genuine  certified  check.     As  soon  as  a  check  is  certi- 
fied the  bank  guarantees  payment. 

tificatioh  to  a  bank  upon  which  it  is  drawn,  the  official 
responsible  for  certification,  usually  the  paying  teller,  must 
be  sure  that  the  check  will  not  overdraw  the  account.  As 
soon  as  a  check  is  certified  the  account  of  the  drawer  is 
charged  with  the  amount  of  the  check  and  the  bank  be- 
comes responsible  for  payment. 

The  Clearing-House  System. — When  the  banking  busi- 
ness of  the  United  States  was  still  in  its  infancy,  checks 


2i6  THE   ELEMENTS   OF   ECONOMICS 

received  by  one  bank  which  were  drawn  upon  another 
were  sent  at  the  end  of  the  banking  day  to  the  bank  upon 
which  they  were  drawn  for  payment.  Two  banks,  each 
having  checks  drawn  upon  the  other,  could  offset  the 
checks  held  against  each  other,  the  balance  only  being 
paid  in  cash.  A  clearing-house  is  an  institution  estab- 
lished by  banks  whereby  the  accounts  of  each  member 
bank  against  the  others  may  be  adjusted.  If  there  were 
but  two  banks  in  the  clearing-house,  and  each  held  checks 
of  $10,000  against  the  other,  settlement  would  be  made  by 
exchanging  checks.  If  one  held  checks  to  the  amount  of 
$15,000  and  the  other  to  the  amount  of  $10,000,  accounts 
would  be  balanced  by  the  latter  bank  paying  the  former 
$5,000. 

When  several  banks  are  associated  in  a  clearing-house 
balances  are  settled  in  much  the  same  ^manner.  Each 
bank  sends  to  the  clearing-house  in  separate  packages 
checks  drawn  on  the  other  member  banks  which  it  has 
paid.  Checks  offset  checks  and  balances  show  the  in- 
debtedness of  one  bank  to  another. 

Bills  of  Exchange  and  Drafts. — ^A  bill  of  exchange  is  an 
order  drawn  by  one  person  calling  upon  a  second  person 
to  pay  a  specified  sum  of  money  to  a  third  person.  A 
bank  draft  is  an  order  drawn  by  one  bank  upon  another 
bank  authorizing  it  to  pay  to  a  specified  person  a  certain 
sum  of  money.  Bills  of  exchange  and  drafts  are  used  in 
making  payments  to  persons  living  in  different  cities. 
They  are  commercial  paper  and  may  be  transferred  to 
others  by  indorsement. 

The  Use  and  Abuse  of  Credit. — Among  the  most  con- 
spicuous advantages  of  credit  are  the  following: 


BANKING   AND    CREDIT  217 

1.  It  enables  industrial  and  commercial  enterprises  to 
secure  capital  necessary  for  establishing  and  conducting 
business.  Most  business  houses  use  their  credit  from  time 
to  time. 

2.  It  enables  banks  to  collect  many  comparatively 
small  sums  which  could  not  be  used  to  advantage  by  their 
owners  and  loan  them  for  use  in  productive  industry. 

3.  It  puts  capital  into  the  hands  of  those  who  can 
use  it. 

4.  It  enables  persons  to  borrow  in  order  to  prepare 
themselves  for  a  useful  career,  or  to  tide  over  a  misfortune. 

Among  the  abuses  of  credit  are  the  following: 

1.  It  may  be  too  freely  used  in  speculation  and  result 
in  a  crisis.  In  the  spring  and  early  summer  of  1920,  loans 
were  freely  made  for  the  purchase  and  storage  of  sugar. 
Speculators  imagined  that  the  price  would  reach  thirty- 
five  cents  a  pound  in  the  autumn.  The  price  did  rise  on 
account  of  an  artificial  shortage  created  by  the  speculators, 
but  the  high  price  caused  large  quantities  of  sugar  to  enter 
the  United  States  and  the  price  soon  began  to  fall.  The 
banks  called  in  their  loans  and  the  speculators  were  obhged 
to  sell  at  a  loss  on  a  falling  market. 

2.  Credit  may  stimulate  production  in  certain  lines  and 
lead  to  overproduction  in  these  Hnes.  This  is  especially 
true  when  the  borrower  has  too  little  knowledge  of  the 
business  to  enable  him  to  judge  the  chances  of  success. 
The  candy  business  was  entered  in  1920  by  many  new 
firms  financed  by  borrowing,  which  were  not  able  to  con- 
tinue business  when  conditions  became  more  normal. 

3.  Borrowing  for  consumption  is  often  uneconomic. 
Borrowing  to  buy  an  automobile  for  pleasure  purposes, 


2i8  THE   ELEMENTS   OF   ECONOMICS 

to  purchase  jewelry,  or  any  consumption  good  that  is  not 
a  necessity  are  examples  of  abuses  of  credit. 

Summary. — Banks  serve  the  public  in  many  ways.  The 
most  important  duties  of  banks  are  concerned  with  re- 
ceiving and  keeping  of  deposits,  making  of  loans,  discount- 
ing promissory  notes,  and  issuing  bank-notes.  In  the 
United  States  there  are  several  kinds  of  banks.  These 
include  national  banks,  savings-banks,  trust  companies, 
state  banks,  and  private  banks.  The  chief  business  of 
banks  is  dealing  in  credit.  Among  the  instruments  of 
credit  are  checks,  drafts,  promissory  notes,  bonds,  and 
trade  acceptances.  Clearing-houses  are  devices  for  settling 
balances  between  banks. 

Business  depends  upon  credit;  without  it  there  could  be 
no  business  in  the  modern  sense.  Credit  has  many  ad- 
vantages. Among  the  more  prominent  are  those  men- 
tioned in  the  text.  But  it  should  be  remembered  that  there 
are  disadvantages;  credit  is  sometimes  too  freely  used  and 
business  enterprises  are  started  without  a  sufficient  guar- 
antee of  success;  credit  too  freely  used  in  speculation  may 
result  in  a  panic;  borrowing  for  consumption  is  often 
unwise. 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1.  Name  every  kind  of  bank  that  does  business  in  your  com- 

munity.    Show  the  difference  between  the  various  banks. 

2.  Get  a  copy  of  the  most  recently  published  statement  of  some 

bank.     Show  what  each  item  means. 

3.  Why  should  banks  have  only  "quick  assets"?     Which  of  the 

following  are  quick  assets:  real  estate,  government  bonds, 
stock  in  an  oil  company,  notes  due  in  one  year,  demand 
notes? 


BANKING   AND    CREDIT  219 

4.  Find  out  to  what  extent  trade  acceptances  are  used  in  your 

community. 

5.  Describe  the  business  of  a  clearing-house.     Is  there  a  clearing- 

house in  your  city?  If  not,  how  do  banks  settle  their 
balances  in  dealing  with  one  another? 

6.  Would  it  be  economic  to  borrow  money  to  go  to  college?     To 

pay  a  doctor's  bill?  To  pay  a  premium  on  an  insurance 
policy?  To  take  a  vacation  in  the  country?  To  buy  a 
diamond  ring? 

7.  Would  it  ever  be  economic  to  mortgage  a  house  in  order  to 

obtain  money  for  the  purchase  of  an  automobile  for  pleasure  ? 

8.  Some  stores  endeavor  to  secure  a  large  number  of  patrons  with 

charge  accounts.  Why  do  they  do  this?  What  are  the 
advantages  and  disadvantages  of  charge  accounts  to  pur- 
chasers ? 


CHAPTER  XX 
INDUSTRIAL  DEPRESSIONS  AND  CRISES 

A  close  relationship  exists  between  financial  crises  and 
industrial  depressions.  Some  economists  consider  them  as 
two  aspects  of  the  same  thing.  A  crisis  is  generally  fol- 
lowed by  an  industrial  depression.  In  the  United  States 
there  were  financial  crises  in  1818,  1825,  1837,  1847,  ^857j 
1873,  1875,  1884,  1893,  ^^d  1903.  Financial  crises  have 
generally  occurred  about  once  in  ten  years.  This  fact  led 
the  English  economist  Jevons  to  associate  crises  and  in- 
dustrial depressions  with  sun-spots.  The  larger  sun-spots 
occur  at  intervals  of  about  ten  years,  and  Jevons  main- 
tained that  they  influenced  the  climate  and  rainfall  on  the 
earth  and  so  acted  unfavorably  upon  agriculture.  The 
theory  of  the  influence  of  sun-spots  upon  the  productivity 
of  agriculture  is  not  without  some  plausibility,  but  the 
sun-spot  theory  has  few  advocates,  and  crises  have  often 
occurred  when  the  crops  were  good.  They  have  also 
occurred  in  years  that  did  not  meet  the  ten-year  interval, 
such  as  in  1869  and  1907. 

True  Explanation  of  Regular  Occurrence  of  Crises. — 
There  seems  to  be  a  regular  cycle  from  good  times  to 
industrial  depressions,  then  a  slow  recovery  followed  by 
prosperity  after  which  the  cycle  is  repeated.  Good  times 
are  said  to  contain  the  seed  of  their  own  destruction. 
When  times  are  prosperous  a  feeling  of  optimism  prevails; 


INDUSTRIAL   DEPRESSIONS   AND    CRISES         221 

people  buy  freely  and  prices  rise.  The  banks  have  abun- 
dant funds  and  loans  are  not  difficult  to  secure.  Estab- 
lished industries  increase  their  capacity  and  new  industries 
are  established,  many  of  them  without  sufficient  working 
capital.  The  process  cannot,  however,  continue  forever. 
Some  business  concerns  begin  to  find  difficulty  in  selling 
their  goods.  The  banks  begin  to  increase  rates  on  loans 
and  discounts,  money  is  hard  to  get  and  confidence  is 
shaken.  Some  of  the  weaker  concerns  fail  and  soon  all 
begin  to  retrench. 

Overproduction  and  Crises. — General  overproduction  is 
impossible,  as  it  would  imply  that  there  are  more  goods 
of  all  kinds  than  the  people  can  consume,  but  overpro- 
duction of  one  product  is  not  uncommon.  For  example, 
there  was  overproduction  of  railroads  immediately  after 
the  Civil  War.  The  railroads  could  not  yield  any  profits 
until  the  country  had  grown  large  enough  in  population  and 
industries  to  support  them,  and  in  the  meantime  those 
who  had  financed  the  railroads  suffered.  When  the  rail- 
roads were  being  built  optimism  prevailed.  There  was  a- 
wild  speculation  in  railroad  securities  and  other  essential 
industries  were  neglected. 

The  industrial  fabric  is  like  a  house  of  cards.  A  col- 
lapse in  one  place  may  result  in  the  whole  structure  falling. 
When  there  is  overproduction  of  some  commodity  or  ser- 
vice, the  producer  cannot  sell  at  a  price  sufficient  to  carry 
on  his  business.  Failure  or  temporary  embarrassment  is 
inevitable,  and  if  the  industry  should  be  a  sufficiently  large 
one  it  will  drag  others  into  insolvency  and  will  affect  the 
banks  from  which  it  may  have  borrowed  fundfj.  Under  the 
present  industrial  system  depressions  will  occur  from  time 


222  THE   ELEMENTS   OF   ECONOMICS 

to  time.  A  crisis  naturally  extends  from  one  country  to 
another.  Some  crises  have  been  world-wide,  others  have 
been  confined  to  one  country.  Frequently  a  crisis  has  a 
local  cause,  like  the  bank  failures  in  North  Dakota  in  192 1. 

Crises  can.be  rendered  less  serious  by  conservative  bank- 
ing and  by  business  houses  preparing  for  possible  times  of 
depression  in  their  days  of  prosperity. 

Crop  Failures  and  Crises. — The  failure  of  an  important 
crop,  such  as  cotton  in  the  Gulf  States  or  wheat  in  the 
Northwest,  is  the  cause  of  a  local  depression,  which  may 
extend  over  the  whole  country.  Banks  lend  to  the  farmers. 
If  the  crops  fail,  the  farmer  cannot  pay  his  debts.  The 
failure  of  an  important  crop  has  its  effects  upon  the  rail- 
roads and  upon  many  industries.  If  the  farmers  have  no 
revenue,  they  cannot  buy  machinery  and  other  supplies. 

The  Relation  of  Middlemen  to  Crises. — Professor  Taus- 
sig, in  his  Principles  of  Economics,  vol.  I,  pp.  405-406, 
calls  attention  to  the  part  played  by  the  distributing 
middlemen — the  wholesalers  and  jobbers  and  retailers — in 
•reference  to  crises: 

"These  constitute  the  immediate  purchasing  public  for 
the  'producers.'  When  they  buy  freely,  business  is  brisk; 
when  they  hold  off,  business  is  dull.  They  are  not  only 
subject  to  the  psychological  contagion;  they  are, also  moved 
by  very  simple  calculations  of  profit  and  loss.  Their 
operations  are  almost  exclusively .  in  the  simple  purchase 
and  sale  of  goods,  and  their  success  depends  almost  solely 
on  prices.  They  buy  freely  when  they  think  that  prices 
will  rise,  and  cut  down  purchases  when  they  think  that 
prices  will  fall.  The  very  fact  that  they  so  think,  and 
accordingly  act,  accelerates  the  fall  in  the  other.     During 


INDUSTRIAL  DEPRESSIONS  AND   CRISES         223 

an  up-swing  period,  they  add  to  their  stocks,  thinking  to 
sell  them  at  an  advance,  or  at  least  to  protect  themselves 
against  a  later  rise  in  the  prices  of  what  they  buy. 

"Then  comes  the  shock — a  bad  failure,  a  financial  panic. 
They  jump  to  the  conclusion  that  'things  are  going  down,' 
countermand  old  orders  as  far  as  possible,  give  new  ones, 
live  from  hand  to  mouth  in  their  purchases  and  sales,  and 
wait  until  they  think  that  prices  have  touched  bottom. 
Sooner  or  later  a  good  crop,  the  unexpected  profitableness 
of  some  new  venture,  a  turn  in  foreign  trade,  some  such 
event  gives  the  start  to  a  new  upward  movement.  The 
middlemen  reach  the  conclusion  that  it  is  time  to  buy 
again,  and  to  take  advantage  of  low  prices.  Business 
becomes  more  active,  optimism  returns.  Prices  go  up, 
and  quickly,  because  all  the  dealers  now  think  that  they 
will  go  up,  and  buy  in  consequence.  There  is  thus  an 
accumulation  of  extra  stocks  in  their  hands  in  times  of 
rising  prices,  and  a  depletion  in  times  of  low  prices;  some 
really  increased  flow  to  consumers  at  the  one  stage,  some 
really  lessened  flow  at  the  other;  but  also  an  alternate 
excess  and  deficiency  of  the  supplies  held  in  the  middle- 
men's reservoir." 

The  Banks  and  Crises. — In  times  of  business  depression 
the  banks  are  confronted  with  a  difficult  situation.  Busi- 
ness houses  desire  loans  because  they  cannot  market  their 
goods  to  advantage.  They  do  not  usually  want  cash,  but 
desire  credit  or  assurance  that  they  will  be  taken  care  of 
if  necessity  should  arise.  Good  banking  demands  that 
legitimate  enterprises  should  receive  all  the  support  that 
a  bank  can  wisely  give. 

But  another  difficulty  is  apt  to  arise.     Depositors  want 


224  THE   ELEMENTS  OF  ECONOMICS 

their  money.  A  vague  distrust  often,  without  reason,  is 
enough  to  start  a  run  on  a  bank.  A  rumor  spreads  that 
a  bank  is  in  trouble.  Crowds  of  depositors  assemble  from 
all  quarters  and  form  long  lines  in  front  of  the  paying 
teller's  window.  They  are  panic-stricken  with  the  fear 
that  they  will  not  get  their  money.  Let  confidence  be 
restored  and  the  run  on  the  bank  ceases.  Experience  has 
taught  that  large  amounts  of  cash  lying  on  the  desk  of  the 
paying  teller  will  satisfy  many  that  their  fear  was  without 
reason  and  they  will  go  home. 

Banks  have  an  interest  in  sustaining  each  other.  A 
failure  of  one  bank  is  sure  to  embarrass  some  other  bank. 
Under  the  Federal  Reserve  system  it  is  not  difficult  for  a 
member  bank  which  is  financially  sound  to  secure  cash 
when  needed.  It  merely  has  to  send  securities  to  the 
Federal  Reserve  Bank  of  its  section  and  get  cash  for  them. 

A  clearing-house  may  aid  member  banks,  as  has  been 
done  repeatedly  in  New  York.  In  the  crisis  of  1907  the 
banks  of  New  York  sustained  banks  which  had  done  a 
sound,  conservative  banking  business,  but  allowed  others 
to  fail  because  they  had  engaged  in  reckless  banking.  In 
that  same  crisis  many  sound  banks  did  not  have  at  hand 
sufficient  cash  to  meet  the  demands  of  depositors  and 
restricted  withdrawals  to  small  amounts.  Such  a  pro- 
cedure w^as  unusual,  but  pardonable.  It  need  not  occur 
under  the  Federal  Reserve  banking  system  as  previously 
explained.*  One  reason  for  increased  demands  for  cash 
in  time  of  panic  is  that  confidence  in  checks  and  other  in- 
struments of  credit  is  shaken.  People  wish  ''real  money" 
and  are  inclined  to  accept  nothing  else. 

*  See  pages  207-210. 


INDUSTRIAL   DEPRESSIONS   AND    CRISES         225 

In  time  of  panic  the  banks  see  their  deposits  diminishing 
and  the  demand  for  loans  increasing.  They  can  secure 
cash  for  meeting  the  demands  of  insistent  depositors  by 
selHng  some  of  their  securities  or  by  discounting  some  of 
their  commercial  paper.  Loans  may  be  discouraged  by 
raising  rates  of  interest.  This  will  result  in  discouraging 
any  one  from  borrowing,  unless  he  really  needs  the  money 
and  is  willing  to  pay  for  it. 

Summary. — Industrial  depressions  and  crises  are  closely 
related.  Industrial  depressions  come  when  goods  cannot 
be  sold  at  a  profit.  Business  houses  restrict  their  output 
and  hard  times  result.  It  has  been  observed  that  de- 
pressions come  in  cycles  of  about  ten  years.  Prosperity 
leads  to  overexpansion  and  overspeculation  and  these 
bring  on  a  depression.  Though  overproduction  of  all 
goods  is  impossible,  there  may  be  overproduction  of  one 
product;  in  this  case  it  is  impossible  to  sell  the  product 
at  prices  which  will  pay  for  its  production  and  a  business 
depression  comes  to  producers  of  that  article.  This  may 
involve  others.  Crop  failures  may  result  in  a  depression, 
which  may  cause  a  financial  crisis.  Financial  crises  are 
the  result  of  a  collapse  in  credit  and  make  money  scarce. 
In  time  of  crises  banks  are  in  need  of  money  and  so  they 
raise  rates  of  interest  in  order  to  discourage  loans.  To 
secure  additional  money  they  sell  securities  and  discount 
commercial  paper.  These  are  not  profitable  transactions 
in  time  of  depression.  The  Federal  Reserve  banking 
system  furnishes  a  means  for  member  banks  getting  money 
in  time  of  need. 


226  THE   ELEMENTS   OF   ECONOMICS 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1.  What  goods  have  you  known  to  sell  at  less  than  the  cost  of 

production?    What  was  the  cause  and  the  result? 

2.  Give  an  account  of  some  speculation  in  real  estate  in  your 

vicinity.     What  were  its  results? 

3.  What  was  Black  Friday?     References:    Any  of  the  larger  his- 

tories of  the  United  States  covering  the  period  since  the 
Civil  War. 

4.  Give  an  account  of  the  crisis  of  1893.     Reference:     Same  as 

above. 

5.  Are  the  present  times  prosperous  or  the  reverse?     What  is  the 

outlook  for  the  future? 

6.  How  may  the  Federal  Reserve  Banks  prevent  or  lessen  the 

severity  of  a  panic? 

7.  Why  are  prices  low  in  time  of  panic? 


CHAPTER  XXI 
INTERNATIONAL  TRADE 

Nature  of  International  Trade. — Trade  between  nations 
does  not  differ  essentially  from  trade  between  different 
parts  of  the  same  nation.  Goods  are  made  where  they 
can  be  produced  to  the  greatest  advantage.  Oranges  are 
grown  in  California  and  in  Florida  and  shipped  to  the 
east  and  north.  Shoes  are  made  in  New  England  and 
New  York  and  shipped  to  California  and  Florida.  Each 
section  profits  by  doing  what  is  best  suited  to  it.  Like- 
wise Italy  and  Spain  grow  fruits  for  northern  Europe  and 
in  return  import  manufactured  articles.  Brazil  sends 
coffee  to  the  United  States  and  imports  automobiles. 

It  does  not  necessarily  follow  that  a  country  will  send 
out  only  articles  which  it  can  produce  more  cheaply  than 
the  country  with  which  it  is  trading. 

For  example:  Country  A  produces  iron  at  a  cost  of 
twenty  dollars  per  ton  and  coal  at  a  cost  of  five  dollars 
per  ton.  Country  B  produces  iron  at  a  cost  of  eighteen 
dollars  per  ton  and  coal  at  a  cost  of  two  dollars  per  ton. 
Under  these  circumstances  in  Country  A  four  tons  of  coal 
are  equal  in  value  to  one  ton  of  iron,  but  in  Country  B 
nine  tons  of  coal  are  equal  in  value  to  one  ton  of  iron.  It 
will  clearly  be  profitable  for  Country  B  to  export  coal  and 
import  iron,  although  it  can  produce  each  more  cheaply 

227 


22S 


THE  ELEMENTS  OF  ECONOMICS 


than  Country  A .  This  is  the  same  principle  which  makes 
it  uneconomic  for  a  man  who  is  a  good  architect  and  also  a 
good  carpenter  to  shingle  his  own  house,  although  he  may 
do  the  work  as  effectively  as  the  man  whom  he  employs. 

The  Foreign  Trade  of  the  United  States.— The  trade  of 
the  United  States  with  foreign  countries  is  large  and  con- 
stantly growing.  Our  domestic  trade  is  vastly  more  im- 
portant yet  the  foreign  commerce  has  attracted  more 
attention  because  of  having  been  a  political  issue.  The 
chief  imports  of  the  United  States  are  coffee,  sugar,  manu- 
factured goods,  crude  rubber,  and  gutta-percha.  The  fol- 
lowing table  shows  the  values  and  duties  of  imported 
merchandise  entered  for  consumption  during  the  years 
ending  June  30: 

VALUES 


Free     . 

Dutiable 

Total 

Per  Cent 
Free 

1908. 

Dollars 

525,704,745 

599,375,868 

761,353,117 

776,963,955 

881,512,987 

986,972,333 

1,152,392,059 

1,032,863,558 

1,495,881,357 

1,852,530,536 

2,117,555,366 

Dollars 
657,415,920 
682,265,867 
785,756,020 
750,981,697 
759,209,915 
779,717,079 
754,008,335 
615,522,722 
683,153,244 
814,689,485 
747,338,621 

.  Dollars 
1,183.120,665 
1,281.641.735 
1,547,109.137 
1,527.945,652 
1,640.722.902 
1,766.689.412 
1,906.400.394 
1,648.386.280 
2,179,034.601 
2,667.220,021 
2,864,893.987 

44, Aa 

lOOQ 

46 

49 
50 
53 
55 
60 
62 
68 
69 
73 

77 
21 

85 
73 
87 
45 
66 

65 
46 
91 

I9IO 

I9II 

IQI2           

I913 

I914 

lOI^ 

I916 

I917 

I918 

The  principal  exports  of  the  United  States  are  given  in 
the  following  tables.  It  will  be  noted  that  the  chief  exports 
are  no  longer  food  products: 


INTERNATIONAL   TRADE 


229 


Crude  Materials  for 

Foodstuffs  in 

Crude 

Use  in  Manu- 

Condition, 

and 

Foodstuffs  Partly  or 

Year 

facturing 

Food  Animals 

Wholly  Prepared 

Ending 
June  30 — 

' 

Value 

Per 

Value 

Per 

Value 

Per 

in  Dollars 

Cent 

in  Dollars 

Cent 

in  Dollars 

Cent 

1908 

556,681,462 

30.34 

189,051,824 

10.30 

331,961,663 

18.10 

1909 

520,907,436 

3180 

135,693,409 

8.28 

302,555,341 

18.47 

1910 

565.934,957 

33.10 

109  828,320 

6.42 

259,259,654 

15.16 

1911 

7x3,018,206 

35-41 

103,401,553 

5-13 

282,016,883 

14.01 

1912 

723,008,839 

33-31 

99,899,270 

4.60 

318,838,493 

14.69 

1913 

731,758,513 

30-13 

181,907,266 

7-49 

321,204,373 

13.23 

1914 

792,716,109 

34-03 

137,495,121 

5-90 

293,218,336 

12.59 

1915 

510,455,540 

18.80 

506,993,179 

18.66 

454,575,404 

16.74 

1916 

535,952,043 

12.55 

380,638,102 

8.91 

599,059,151 

14.02 

1917 

731,990,339 

11.76 

531,866,009 

8.54 

737,795,334 

11.85 

1918 

897,324,082 

15-37 

374,978,216 

6.42 

1,153,702,460 

19.76 

Year 
Ending 

Manufactures  for 
Further  Use  in 
Manufacturing 

Manufactures 
Ready  for  Con- 
sumption 

Miscellaneous 

Total 
Value 

June 
30— 

Value 

Per 
Cent 

Value 

Per 
Cent 

Value 

Per 
Cent 

1908. 
1909. 
1910. 
1911. 
1912. 
1913- 
1914- 
1915- 
1916. 
1917- 
1918. 

261,105,883 
231,144,267 
267,765,916 
309,151,989 
348,149,524 
408,806,949 
374.224,210 
355,862,329 
657,923.305 
1,191,262,523 
1,201,439,423 

14.23 
14.11 
15.66 
15-35 
16.04 
16.83 
16.06 
13.10 
15-40 
19.13 
20.58 

489,469,958 
440,271,747 
499,215,329 
598,367,852 
672,268,163 
776,297,360 
724,908,000 
807,465,511 
1,998,298,249 

2,942,577,415 
2,185,420,221 

26.68 
26.87 
29.19 
29.72 
30.98 
31.97 
31-11 
29-73 
46.77 
47.25 
37.43 

6,515,567 

7,783,393 

8,079,822 

7,592,542 

8,155,539 

8,531,897 

7,122,249 

80,826,502 

100,306,729 

91,672,430 

25,787,655 

.35 

•47 

•47 

.38 

•  38 

.35 

-31 

2.97 

2-35 

1.47 

.44 

1,834,786,357 
1,638,355,593 
1,710,083,998 
2,013,549,025 
2,170,319,828 
2,428,506,358 
2,329,684,025 
2,716,178,465 
4,272,177,579 
6,227,164,050 
5,838,652,057 

Balance  of  Trade. — ^A  country  which  exports  in  value 
a  greater  quantity  than  it  imports  is  said  to  have  a  favor- 
able balance  of  trade.  It  was  once  thought  that  a  favor- 
able balance  of  trade  was  always  good  for  a  country  but 
economists  have  shown  the  fallacy  of  this.     Exports  for 


230  THE   ELEMENTS   OF   ECONOMICS 

the  most  part  pay  for  imports,  differences  in  value  only 
being  paid  by  shipments  of  money.  It  may  happen  that 
a  country  has  a  favorable  balance  of  trade  and  this  favor- 
able balance  merely  pays  the  interest  on  debts  which  are 
owed  to  people  residing  in  other  countries.  Egypt  has  a 
favorable  balance  of  trade,  but  it  owes  so  much  to  other 
countries  that  the  difference  between  values  of  exports  and 
imports  goes  to  pay  its  debts.  England  brings  in  more 
than  she  sends  out.  However,  she  does  not  have  to  pay 
money  for  the  excess.  Profits  on  her  investments  abroad, 
interest  upon  money  lent  to  foreign  borrowers  and  earn- 
ings of  British  ships  account  for  the  excess  of  imports  over 
exports. 

If  two  countries  trade  with  each  other  and  each  has  a 
gold  monetary  standard  with  no  great  difference  in  their 
international  debts,  exports  of  gold  will  pay  differences 
in  the  balance  of  trade.  Continued  imports  of  money 
into  a  country  will  cause  prices  to  rise  and  purchases  by 
foreigners  will  decrease  until  the  favorable  balance  is 
destroyed.  If  money  leaves  a  country  on  account  of  an 
unfavorable  balance  of  trade,  prices  will  fall  and  exports 
will  be  encouraged.  These  forces  will  tend  to  make  ex- 
ports and  imports  balance,  when  the  circumstances  are 
as  given. 

Payment  of  International  Obligations. — Most  interna- 
tional debts  are  settled,  not  by  the  shipment  of  money, 
but  by  drafts  or  bills  of  exchange.  A  person  in  New  York 
who  wishes  to  pay  for  gopds  bought  in  London  will  go  to 
a  banker  or  broker  and  buy  a  draft  on  London.  The 
price  of  bills  of  exchange  varies  with  demand  and  supply. 
If  many  merchants  in  London  desire  bills  of  exchange  on 


IN  rERNATIONAL   TRADE 


231 


New  York  and  few  have  accounts  payable  in  New  York, 
the  price  will  rise.  In  normal  times  the  English  pound 
sterling  is  worth  $4,866  in  United  States  money.     The 


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A  FOREIGN  BILL  OF  EXCHANGE 

Bills  of  exchange  are  issued  in  duplicate  and  each  part  sent  by  different  boat. 
When  one  part  is  paid  the  other  becomes  valueless.  Bills  of  exchange  may  be 
purchased  from  large  American  banks  payable  in  the  leading  cities  of  the  world. 

expense  of  shipping  $4,866  in  gold  to  London  is  normally    ' 
less   than   .03,  so  if  exchange  were  more  than  $4,896  it 
would  pay  to   ship  gold  rather  than  purchase  a  bill  of 
exchange. 


232  THE   ELEMENTS   OF   ECONOMICS 

The  currency  of  all  the  great  countries  has  been  inflated 
as  a  result  of  the  war,  and  this,  together  with  great  loans 
made  to  European  powers,  used  chiefly  to  purchase  sup- 
plies in  America,  and  a  balance  of  trade  throughout  the 
war  in  favor  of  America,  has  made  foreign  exchange  ab- 
normal during  recent  years.  Shipments  of  gold  to  Amer- 
ica were  made  from  time  to  time  during  the  war,  but,  on 
account  of  the  tremendous  demand  for  American  goods 
in  Europe,  exchange  continued  in  favor  of  the  United 
States.  The  former  rates  of  exchange  will  tend  to  be 
restored  as  the  European  countries  restore  their  currency 
to  a  gold  basis  and  as  industries  in  Europe  recover  from 
the  effects  of  war. 

The  rate  of  sterling,  or  English  exchange,  depends  to  a 
large  degree  upon  prices  in  America  as  compared  with 
prices  in  England.  Falling  prices  in  America  attract 
European  customers  and  add  to  the  demand  for  exchange 
on  New  York.  Rising  prices  here  check  demands  for 
New  York  exchange  in  London  and  add  to  demands  from 
America  for  goods  of  foreign  origin.  Rates  of  interest  in 
New  York,  as  compared  to  those  in  London,  also  affect 
rates  of  exchange.  When  money  is  more  in  demand  in 
New  York  than  in  London,  sterling  exchange  tends  to  rise. 
Many  obligations  in  countries  other  than  England  are  set- 
tled by  sterling  exchange. 

For  example,  the  large  export  trade  in  coffee  from  Brazil 
to  the  United  States  results  in  a  favorable  balance  of  trade 
for  Brazil,  but  Brazil  has  a  constant  demand  for  exchange 
on  London.  The  New  York  coffee  importer  pays  for  his 
purchases  by  sending  an  order  on  London  to  Brazil  and  this 
is  readily  sold  in  Brazil.     This  is  often  called  a   three- 


y///.  :^.r-/        June  .^^ 


M«8srs.    John  I>oe  iSt  Co. 
Paris,   France. 


y/f  ///ft////ff^j///'/Y  yi  /-  /'.  ■',  ,,>  The  Chemical  National  BanJt  of  So*  \or\ 

//r ///>////////  Mr.   fticjsrd   Roe 

/.•^»,/i/  w,//  ^'f  u//»,  ,/,''^j<r>,/'ff^//ifo//  ono   hundred   thousand   franca 

^   ?r. 100. 000.   ■^ 
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yr'/-  $eventy-five   per   Qsnty^"''^  n/A/r/^         Canton  crape 

///<  //////V/"     Brooklyn,    N.    Y. 

■  //,f  i/,//im//f/>  M,/,//'-f'  //'/,',^/./!/<.''^^f,,,/f„/r,,  .j/ff/tf/zv      September  9t>i,    ifil 

y/f^  f/ujJ///Yf/    K//^f/u//    /////// -y    \r/r///r/. 


I 


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/^ii/-/ m//j//r////rfjff/jr     Chemical    WaliOiiaj.    i&x^f.    of  New  Yorx  /,//// //if 

<///</  ^/////j  /////.,/ /r  y/^//-/////  //S/-  /,^//5^  Ar/v,-/ /y  ///r  ///j./^ /w///y    ///////  //-    f!,//,Afn 

//f  A,  ff/'i/ ji//rfr  f/ f//,  *///' /''m// ^,-j / /,i/Wu /n/m/  /f'/m /f.o  ^/-///rn /'/ //re>//, //..urn  /////// 
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/tf/»fN/rt////t/f////j',/y/ff/^        Chemical    National   Baolt  of  New  Tork 


A  COMMERCIAL  LETTER  OF  CREDIT 


233 


234  THE   ELEMENTS   OF   ECONOMICS 

cornered  exchange.  The  extensive  system  of  English 
banks  throughout  the  world  and  the  large  commercial 
interests  of  English  houses  in  every  large  port  in  the  world 
have  given  a  ready  demand  for  sterling  exchange  in  all 
countries.  *' Dollar  exchange,"  or  exchange  sold  on  Ameri- 
can banks,  has  become  more  common  as  a  result  of  the 
war.  Branches  of  American  banks  are  now  to  be  found 
in  many  parts  of  the  world,  and  the  great  demand  for 
American  goods  has  given  rise  to  increased  use  of  ^'dollar 
exchange." 

The  Edge  Act  and  the  Webb-Pomerene  Act. — Credits 
for  commercial  purposes  in  the  United  States  are  seldom 
made  for  more  than  ninety  days.  Credits  in  South 
America  are  often  made  for  a  year,  and  in  the  devastated 
regions  of  Europe  payments  for  goods  are  made  in  securi- 
ties that  run  for  a  term  of  years.  Under  the  Federal 
Reserve  Act  and  state  banking  acts,. the  American  exporter 
could  not  accept  such  payments,  as  they  could  not  be  sold 
to  bankers  and  he  could  not  carry  them  himself,  as  it 
would  tie  up  his  operating  capital.  Now  the  Edge  Act 
permits  international  banks,  organized  in  accordance  with 
its  provisions,  to  deal  in  just  this  kind  of  securities.  An 
exporter  of  American  goods  can  now  sell  his  goods  and 
receive  in  payment  a  note  due  in  one  year.  This  note  he 
can  take  to  an  Edge  law  bank  and  receive  his  money 
within  two  weeks. 

The  Edge  Act  is  designed  to  aid  in  financing  the  foreign 
trade  of  the  United  States;  so  the  Webb-Pomerene  Act 
seeks  to  put  American  exporters  on  a  par  with  foreign 
exporters.  In  seeking  foreign  trade  the  Webb-Pomerene 
Act  permits  American  exporters  to  combine.     Though  the 


INTERNATIONAL   TRADE  235 

Sherman  Act  prohibits  domestic  combinations  in  restraint 
of  trade,  the  Webb-Pomerene  Act  authorizes  combinations 
of  exporters.  This  is  necessary  if  the  United  States  is  to 
have  her  share  in  the  foreign  markets.  Foreign  com- 
petitors of  American  trading  companies  have  formed  com- 
binations for  mutual  benefit;  this  is  especially  true  of  the 
Germans. 

There  are  two  ways  in  which  exporters  may  organize  to 
take  advantage  of  the  opportunities  afforded  by  the  Webb- 
Pomerene  Act. 

1.  Competing  manufacturers  may  form  stock  com- 
panies to  handle  their  foreign  business.  All  matters 
relating  to  their  foreign  trade,  including  sales,  cred- 
its, and  advertising,  are  managed  by  these  stock  com- 
panies. 

2.  Manufacturers  and  exporters  may  form  associations 
for  the  purpose  of  agreeing  upon  a  foreign  policy.  The 
object  of  these  associations  is  to  avoid  competition  among 
themselves  and  offer  efTective  competition  to  foreign  manu- 
facturers and  exporters. 

Summary. — Foreign  trade  is  similar  to  domestic  trade 
in  that  each  party  to  an  exchange  may  benefit.  The  for- 
eign trade  of  the  United  States  is  large,  but  not  as  com- 
pared to  our  domestic  trade.  A  favorable  balance  of 
trade  is  not  necessarily  good  for  a  country.  International 
debts  are  usually  paid  by  bills  of  exchange.  Exchange  on 
London  is  called  sterling  exchange  and  is  used  in  settling 
debts  owed  in  various  parts  of  the  world.  The  Edge  Act 
makes  it  possible  for  American  exporters  to  grant  long- 
time credits  and  has  resulted  in  the  increased  use  of  dollar 
exchange.     The   Webb-Pomerene   Act   permits   American 


236  THE   ELEMENTS   OF   ECONOMICS 

companies  to  form  associations  through  which  they  may 
co-operate  for  the  increase  of  foreign  trade. 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1 .  Is  foreign  trade  or  domestic  trade  more  beneficial  to  a  country  ? 

Some  say  that  there  is  only  one  profit  in  foreign  trade  and 
two  in  domestic  trade.     What  do  you  think? 

2.  Would  a  favorable  balance  of  trade  be  good  for  Germany? 

For  England?  Why? 

3.  Find  from  the  financial  column  of  a  newspaper  the  present 

quotations  of  an  English  pound,  an  Italian  lira,  a  French 
franc.  Are  these  quotations  normal?  Explain  the  causes 
for  any  abnormal  rates. 

4.  With  what  foreign  nations  does  your  city  have  trade  relations  ? 

What  are  the  leading  exports  and  imports? 

5.  Do  you  look  with  favor  on  the  Webb-Pomerene  Act  ?     Why  not 

permit  like  combinations  in  the  domestic  market? 


CHAPTER  XXII 
RESTRICTIONS  ON  INTERNATIONAL  TRADE 

Tariffs. — Tariffs  are  duties  or  taxes  on  imports.  Duties 
on  imports  are  of  three  kinds:  (i)  Tariffs  for  revenue 
only,  (2)  tariffs  primarily  for  revenue  but  with  incidental 
protection,  (3)  protective  tariffs. 

A  tariff  for  revenue  only  may  be  levied  on  goods  pro- 
duced outside  the  country  and  with  which  home  products 
do  not  come  in  competition.  An  import  duty  on  tea  or 
coffee  would  be  an  example,  or  a  tariff  might  be  for 
revenue  only  if  collected  upon  imported  articles  provided 
a  similar  tax  be  placed  upon  goods  of  the  same  kind  pro- 
duced within  the  country.  For  example,  a  tariff  of  two 
cents  an  ounce  might  be  collected  at  the  port  on  imported 
tobacco  and  an  internal  revenue  tax  of  the  same  amount 
be  levied  upon  domestic^  tobacco. 

A  tariff  which  gives  slight  protection  to  the  domestic 
producer  but  is  chiefly  for  revenue  is  known  as  a  tariff  for 
revenue  with  incidental  protection.  For  example,  a  tariff 
of  10  per  cent  on  the  value  of  wool  imported  into  this 
country  would  produce  a  large  revenue  and  give  slight 
protection. 

A  protective  tariff  is  chiefly  designed  to  protect  American 
products  from  foreign  competition.  To  do  this  the  tariff 
must  be  high  enough  to  raise  the  price  of  the  imported 
article  to  the  American  consumer. 

237 


238  THE   ELEMENTS   OF   ECONOMICS 

The  Infant-Industries  Argument. — The  chief  argument 
in  favor  of  a  protective  tariff  is  the  infant-industries  argu- 
ment. A  protective  tariff  may  encourage  industries  for 
which  the  country  is  well  suited,  but  which  cannot  be 
started  without  some  protection  against  the  competition 
of  foreign  manufacturers.  Advocates  of  a  tariff  of  this 
kind  acknowledge  that  prices  will  be  increased  and  that 
capital  will  be  induced  to  go  into  the  new  industry  which 
might,  without  the  tariff,  be  more  profitably  employed  in 
some  other  industry.  They  maintain  that  the  ultimate 
result  will  justify  the  immediate  sacrifice.  The  new  in- 
dustry will  grow  under  the  sheltering  wing  of  protection 
until  it  becomes  able  to  take  care  of  itself.  For  example, 
at  one  time  American  lace  could  not  be  produced  in  com- 
petition with  foreign  lace.  A  high  protective  tariff  was 
imposed  and  American  manufacturers  turned  their  atten- 
tion to  the  making  of  lace,  with  the  result  that  the  in- 
dustry became  established. 

There  is  much  to  be  said  in  favor  of  protection  for  infant 
industries.  Such  protection  is  a  temporary  expedient. 
When  the  industry  is  well  established,  the  protection  may 
be  removed.  If  the  industry  does  not,  after  a  time,  be- 
come established,  we  may  assume  that  the  country  is  not 
well  suited  for  this  industry  and  the  tariff  should  be  re- 
moved. The  difficulty  in  putting  this  theory  into  practice 
is  that  protected  industries  never  reach  the  point  when 
they  regard  themselves  as  able  to  get  along  without  pro- 
tection. 

The  Home-Market  Argument. — In  the  early  days  of 
American  protective  tariffs,  Henry  Clay  applied  the  home- 
market  theory  with  great  effect.     Manufactures,  he  said, 


RESTRICTIONS   ON   INTERNATIONAL   TRADE     239 

lead  to  the  growth  of  cities.  The  farmer  should  h^ve  a 
home  market  for  his  produce,  and  should  be  spared  the 
expense  of  long  transportation.  Moreover,  the  home 
cities  would  give  him  a  market  which  could  not  be  closed 
in  time  of  war.  This  argument  once  had  some  force. 
Now  that  the  home  market  has  been  created,  some  stu- 
dents think  that  the  cities  have  been  overdeveloped  at 
the  expense  of  the  country. 

The  War  Argument. — Those  who  favor  protection  argue 
that,  as  a  war-protective  measure,  this  country  should  be 
made  independent  of  other  countries.  We  may  take  as  an 
example  the  dependence  of  the  United  States  upon  the 
dyes  of  Germany  in  19 14.  Not  only  were  we  without 
adequate  dyes,  but  by-products  of  the  dye  industry  are 
necessary  to  the  making  of  high  explosives.  This  was  a 
serious  handicap  to  the  United  States  when  it  prepared  to 
enter  the  war.  Much  is  to  be  said  in  favor  of  such  a  policy 
in  regard  to  a  few  industries  at  least  until  the  world  be- 
comes sufficiently  civilized  to  dispense  with  wars. 

Closely  akin  to  this  argument  is  the  one  that  a  country 
cannot  allow  industries  which  were  established  during  a 
war  to  perish  by  foreign  competition.  This  argument  has 
been  raised  in  the  United  States  after  every  great  war  and 
the  demands,  at  least  in  part,  have  always  been  granted. 

The  Tariff  and  Wages. — We  often  hear  the  argument 
that  the  American  working  man  has  a  higher  standard  of 
living  than  is  prevalent  in  other  countries  and  that  there- 
fore American  employers  of  labor  must  receive  higher 
prices  for  their  products  in  order  to  pay  higher  wages. 
To  the  free  trader  this  argument  appears  to  be  a  fallacy. 
American  wages  are  higher  because  the  American  laborer  is 


240  THE   ELEMENTS   OF   ECONOMICS 

a  better  producer  than  most  foreigners.  American  iron  and 
steel  products,  for  example,  compete  in  prices  and  quality 
with  those  produced  elsewhere  in  such  markets  as  those 
of  South  America,  China,  and  Manchuria.  The  American 
working  man  is  better  paid,  but  the  labor  cost  is  no  greater. 
England  is  nearer  being  a  free-trade  country  than  any 
other  great  country  of  the  world,  yet  wages  in  England 
have  always  been  higher  than  in  Germany,  which  for  years 
has  had  a  high  protective  tariff.  An  employer  can  afford 
to  pay  good  wages,  whether  the  tariff  is  high  or  low,  if  the 
employee  produces  enough  to  justify  it.  We  should  not 
forget  that  the  laborer  is  a  consumer  and  that  whatever 
increases  his  cost  of  living  affects  unfavorably  the  buying 
power  of  his  wages. 

Most  American  workmen  do  not  work  in  industries 
which  are  protected.  Among  the  unprotected  laborers 
are  those  in  the  building  trades,  most  farmers,  all  railroad 
employees,  firemen,  policemen,  domestic  servants,  porters, 
truckmen,  and  most  factory  laborers.  Their  wages  are 
equal  to  the  wages  of  the  minority  who  work  in  factories 
having  some  benefit  from  the  protective  tariff. 

The  Anti-Dumping  Argument. — By  dumping  is  meant 
the  shipping  of  a  surplus  which  cannot  be  sold  at  home  at 
a  profit  to  another  country  and  selling  this  surplus  for  what 
it  will  bring.  By  this  means  prices  are  kept  at  a  paying 
level  in  the  home  market.  For  example,  English  manu- 
facturers of  razors  might  find  themselves  with  a  surplus 
which  could  not  be  sold  at  a  profit.  They  do  not  wish  to 
hold  them  in  stock  and  so  send  them  to  Brazil  and  sell 
them  at  any  price  they  can  get. 

A  protective  tariff  does  not  prevent  dumping,  though 


RESTRICTIONS   ON   INTERNATIONAL   TRADE     241 

it  makes  it  less  common.  Dumping  is  resorted  to  from 
time  to  time  by  manufacturers  in  all  countries,  our  own 
included. 

A  Protective  Tariff  Invites  Retaliatory  Tariffs. — If  any 
country  adopts  a  policy  of  protection  it  may  expect  other 
countries  to  retaliate.  American  protective  tariffs  on 
some  of  the  agricultural  products  of  Canada  resulted  in 
Canadian  retaliation.  America  lost  a  market  for  some  of 
her  goods  when  she  closed  her  markets  to  Canada  by  pro- 
tective tariffs.  If  all  countries  have  protective  tariffs  the 
advantage  to  any  one  vanishes. 

The  Protective  Tariff  and  Monopolies. — The  free  trader 
sometimes  says  that  "  the  tariff  is  the  mother  of  the  trusts." 
The  statement  is  not  true  because  most  monopolies  are  in 
industries  not  aided  by  the  tariff.  However,  a  protective 
tariff  may  encourage  combinations  among  producers.  If  a 
protective  tariff  is  placed  upon  som§  article,  the  producers 
of  that  article  are  encouraged  to  combine  in  an  association 
with  the  object  of  raising  the  price  to  a  point  just  below 
that  which  will  enable  the  foreign  producer  to  enter  the 
field.  For  example,  if  watches  of  a  certain  grade  can  be 
produced  in  the  United  States  to  sell  at  fifty  dollars  each 
and  the  foreign  producer  can  make  them  to  sell  at  forty 
dollars,  a  protective  tariff  of  50  per  cent  ad  valorem  would 
bar  out  the  foreign  product.  But  the  domestic  producers 
would  then  have  an  inducement  to  combine  and  raise  the 
price  to  a  point  just  below  what  would  permit  the  foreign 
producer  to  market  his  watches  in  America,  knowing  that 
at  that  price  they  would  have  the  market  to  themselves. 

Sometimes  articles  of  American  manufacture  can  be 
bought  more  cheaply  abroad  than  in  the  United  States. 


242  THE   ELEMENTS    OF   ECONOMICS 

This  is  occasionally  the  result  of  the  American  producer 
'' dumping"  his  surplus  goods  abroad,  but  it  is  more  often 
because  the  manufacturers  have  the  monopoly  of  the  goods 
in  question  and  may  charge  a  monopoly  price,  but  they 
compete  with  foreign  producers  abroad  and  make  a  profit 
on  their  foreign  sales.  When  such  a  condition  exists,  it 
proves  that  a  protective  tariff  is  not  necessary  or  desirable 
in  the  industry  concerned. 

Who  Pays  the  Tariff? — Ordinarily  the  consumer  of  a 
protected  article  pays  the  tax.  The  tax  is  originally  paid 
by  the  importer  who  shifts  it  to  the  wholesaler  and  he  in 
turn  shifts  it  to  the  retailer.  For  example,  an  overcoat 
valued  at  twenty-five  dollars  at  the  custom-house  would 
cost  the  importer  $37.50  if  a  tariff  of  50  per  cent  ad  valorem 
were  collected.  He  sells  it  to  the  wholesaler  for  $37.50 
plus  his  profit,  and  so  it  goes  until  it  reaches  the  consumer, 
who  pays  all  expenses. 

However,  this  is  not  always  the  case.  Sometimes  the 
foreign  producer  pays  the  tax.  If  the'  foreign  producer 
can  still  get  a  profit  after  reducing  his  price  by  the  amount 
of  the  tariff,  he  may  be  inclined  to  do  so.  When  England 
put  a  tax  on  the  importation  of  American  automobiles,  the 
manufacturer  of  a  popular-priced  American  car  reduced 
the  price  in  England  by  the  amount  of  the  tax. 

Protection  Seldom  Increases  the  Total  Industries  of  a 
Country. — Usually  a  protective  tariff  merely  shifts  capital 
from  one  industry  to  another.  For  example,  if  a  high  pro- 
tective duty  is  placed  upon  a  certain  article  which  up  to 
this  time  has  chiefly  been  imported,  capital  is  encouraged 
to  invest  in  a  plant  for  the  making  of  that  article  rather 
than  to  seek  employment  in  some  of  the  established  indus- 


RESTRICTIONS   ON   INTERNATIONAL   TRADE     243 

tries  of  the  country.  Capital  always  seeks  employment 
and  goes  to  those  industries  that  promise  the  largest 
returns. 

There  are,  however,  cases  in  which  a  protective  tariff 
actually  adds  to  the  industries  of  a  country.  The  Canadian 
protective  tariff  resulted  in  several  American  manufac- 
turers building  factories  in  Canada  to  produce  goods  for 
the  Canadian  markets.  English  manufacturers  have  in  a 
like  manner  established  branch  factories  in  the  United 
States. 

Conclusion. — It  seems  that  the  importance  of  the  tariff 
has  been  greatly  exaggerated  because  of  its  having  been  a 
political  issue.  The  United  States  has  prospered  under 
high  tariffs  and  under  low  tariffs.  England  has  flourished 
under  free  trade  and  Germany  under  protection. 

Once  the  industries  of  the  United  States  become  accus- 
tomed to  a  certain  tariff,  the  abundant  resources  of  the 
country  and  the  productive  capacity  of  the  people  are  sure 
to  bring  prosperity  under  normal  conditions.  *' Tariff 
tinkering,"  as  frequent  changes  in  the  tariff  are  called, 
slows  up  industry  because  it  creates  uncertainty  and  un- 
rest. To  have  a  policy  and  keep  to  it  for  a  term  of  years 
is  better  than  shifting  from  one  plan  to  another. 

Summary. — Tariffs  are  of  three  kinds:  (i)  Tariffs  for 
revenue  only,  (2)  tariffs  primarily  for  revenue  but  with 
incidental  protection,  (3)  tariffs  primarily  for  protection. 
The  importance  of  the  tariff  has  been  exaggerated.  The 
United  States  has  been  prosperous  under  various  tariffs. 
Germany  prospered  with  protection  and  England  with  free 
trade.  The  leading  arguments  for  a  protective  tariff  are: 
The  infant-industries  argument,   the  home-market  argu- 


244  THE   ELEMENTS   OF   ECONOMICS 

ment,  the  war  argument,  and  the  wages  argument.  Of 
these  the  infant-industry  argument  has  the  most  force. 
Protective  tariffs  invite  retaliation  by  other  countries.  A 
protective  tariff  may  promote  monopoly.  The  duties  col- 
lected at  the  port  are,  as  a  rule,  shifted  to  the  consumer  in 
the  form  of  higher  prices.  A  protective  tariff  seldom  in- 
creases the  total  industries  of  a  country. 


TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1.  What  are  the  effects  of  dumping  upon  the  consumer?     Upon 

the  home  manufacturer? 

2.  What  do  you  consider  the  strongest  argument  in  favor  of  pro- 

tection?    In  favor  of  free  trade?     Why? 

3.  Some  countries  give  bounties  to  encourage  home  producers. 

How  do  bounties  differ  from  protective  tariffs  in  their  in- 
fluence upon  prices?  Bounties  on  exports  have  been  given 
by  some  countries.  This  would  stimulate  the  export  trade. 
Would  it  mean  the  taxing  of  the  people  of  one  country  in 
order  that  the  people  of  another  country  might  enjoy  cheap 
goods  ? 

4.  Show  why  "tariff  tinkering"  injures  business. 

5.  Has  the  time  come  when  the  United  States  should  abandon 

protection?  References  in  favor  of  free  trade:  Taussig, 
Tar  if  History  of  the  United  States  ;  Ashley,  The  Tariff  Prob- 
lem; Henry  George,  Protection  or  Free  Trade;  Ely,  Problems 
of  To-day,  pp.  1-86. 

References  in  favor  of  protection:  Gunton,  Social  Eco- 
nomics, pp.  320-361;  Patten,  Economic  Basis  of  Protection; 
Stan  wood,  American  Tariff  Controversies. 

General  references:  Carver,  Principles  of  Political  Econ- 
omy, chaps.  XXVIII,  XXIX;  Ely,  Outlines  of  Economics, 
pp.    368-382;    Hadley,    Economics,    pp.    421-445;    Taussig, 


RESTRICTIONS   ON  INTERNATIONAL   TRADE       245 

Principles  of  Economics,  chaps.  XXXVI,  XXXVII;  Mill, 
Principles  of  Political  Economy,  book  III,  chaps.  XVII-XXI. 
6.  During  the  Great  War  many  plants  for  the  manufacture  of 
chemicals  were  established  in  the  United  States  and  millions 
of  dollars  invested  in  them.  When  the  war  was  over  the 
American  producers  claimed — and  the  claim  was  sound- 
that  unless  they  were  given  protection  the  German  manu- 
facturers would  undersell  them  in  America  and  force  them 
out  of  business.  Was  it  a  wise  policy  to  grant  their  de- 
mands ? 


CHAPTER  XXIII    . 
MONOPOLIES 

Definition  of  Monopoly. — Monopoly  is  the  absence  of 
effective  competition.  It  is  characterized  by  ability  to 
fix  prices.  Mere  size  does  not  constitute  monopoly.  The 
great  department  stores  in  our  cities  compete  with  one 
another  fully  as  energetically  as  the  small  dealers. 

It  is  not  necessary  that  a  monopoly  should  have  complete 
control  of  the  supply.  It  may  fix  prices  of  an  article  if  it 
controls  a  large  proportion  of  the  supply.  The  Standard 
Oil  Company  has  never  been  the  only  company  engaged  in 
any  part  of  the  oil  business,  yet,  because  it  has  controlled 
from  80  to  90  per  cent  of  the  supply  of  petroleum  products, 
it  has  been  able  to  fix  prices. 

Monopoly  Prices. — Monopoly  price  is  the  price  that 
yields  the  largest  profits.  This  price  will  vary  from  time 
to  time.  The  street  railroads  are  monopolies  in  almost  all 
American  cities.  A  few  years  ago  a  five-cent  fare  was 
almost  universal;  even  where  such  a  rate  was  not  fixed  by 
law  it  was  in  force  because  such  a  fare  was  most  profitable 
to  the  corporation.  Since  the  war  a  five-cent  fare  no 
longer  yields  the  largest  net  return  and  in  some  places 
results  in  a  loss.  Hence  there  has  come  a  demand  for  a 
higher  fare  by  the  street-railroad  corporations. 

Under  the  conditions  given  in  the  following  table  a  five- 
cent  fare  would  result  in  the  largest  profits,  but  conditions 
may  change.  Labor  might  become  more  expensive.  Supplies 

246 


MONOPOLIES  247 

ILLUSTRATION  OF  THE  LAW  OF  MONOPOLY  PRICE 


Street  Railroad 
Fares 

Number  of 
Passengers 

Gross 
Income 

Fixed 
Charges 

Operating 
Expenses 

Net 
Income 

10  cents 

8      "     

7      "     

6      "     ........ 

5      "     

4      "     

500,000 
800,000 
1,000,000 
1,400,000 
2,000,000 
2,100,000 

$50,000 
64,000 
70,000 
84,000 

100,000 
84,000 

$25,000 
25,000 
25,000 
25,000 
25,000 
25,000 

$15,000 
16,000 
17,000 
19,000 
22,000 
22,000 

$10,000 
23,000 
28,000 
40,000 
53.000 
37,000 

of  all  kinds  might  rise  in  price  and  even  the  fixed  charges 
might  become  greater  through  the  necessity  of  paying  more 
interest  on  new  issues  of  bonds.  Under  these  new  con- 
ditions the  average  person  would  think  no  more  of  ten 
cents  than  he  had  previously  thought  of  five. 

The  following  table  illustrates  the  prices  at  which  the 
largest  profits  could  be  obtained: 


Rate  of  Fare 

Number  of 
Passengers 

Gross 
Income 

Fixed 
Charges 

Operating 
Expenses 

Net 
Income 

5  cents 

6  "     

7  "     

8  "     

9  "     • 

10  "     

11  "     

2,000,000 
2,000,000 
2,000,000 
1,900,000 
1,800,000 
1,700,000 
1,500,000 

$100,000 
120,000 
140,000 
152,000 
162,000 
170,000 
165,000 

$40,000 
40,000 
40,000 
40,000 
40,000 
40,000 
40,000 

$45,000 
45,000 
45,000 
45,000 
45,000 
42,000 
40,000 

$15,000 
35,000 
55,000 
63,000 
73,000 
88,000 
85,000 

If  unrestricted  by  its  charter  as  to  fares  and  there  were 
no  limit  to  fares  by  law,  the  company  would  charge  ten 
cents,  but  if  the  legal  rate  were  five  cents  it  would  com- 
plain that  such  a  rate  was  in  the  nature  of  confiscation 
and  would  demand  the  privilege  of  charging  a  higher  rate. 


248 


THE   ELEMENTS  OF  ECONOMICS 


Classification  of  Monopolies. — Monopolies  have  been 
classified  by  many  economists,  but  none  seems  so  satis- 
factory as  that  of  Professor  Charles  J.  Bullock,  from  whose 
work*  the  following  is  in  part  an  adaptation: 

r  Exceptional    artists, 
Monopolies  of  Personal  Ability  {      singers,  surgeons, 

[      etc. 

{Monopolies  secured 
by  patents  and 
copyrights. 


Monopolies 


Legal  Monopolies 


Public 


Natural  Monopolies 


Capitalistic  Monopolies 


Fiscal — like  the  to- 
bacco monopoly 
of  France. 

Service— like  the 
United  States 
postal  system. 

Monopolies  of  loca- 
tion. 

Monopolies  on  ac- 
count of  the  na- 
ture of  business. 


Personal  Monopolies. — Personal  monopolies  may  result 
from  very  exceptional  personal  ability.  An  opera-singer 
may  surpass  any  other  at  any  given  time  and  will  command 
an  unusual  price  for  his  services.  Surgeons  of  unusual 
ability,  as  well  as  actors  and  even  business  men  of  re- 
markable talent,  have  monopoly  powers.  Such  monopolies 
are  not  of  great  importance,  as  acquired  powers  are  not 
transmitted  to  descendants. 

Private  Legal  Monopolies. — Privileges  were,  in  olden 
times,   granted  by  sovereigns   to   their  favorites.     These 

*Introduction  to  the  Study  of  Economics,  pp.  313-318. 


MONOPOLIES  249 

often  consisted  in  giving  them  monopolies  to  sell  certain 
objects.  Monopolies  of  this  kind  were  especially  common 
in  the  time  of  Queen  Elizabeth  and  her  immediate  suc- 
cessors. So  great  was  the  opposition  to  private  monopo- 
lies that  a  law  of  1624  forbade  them  except  in  case  of 
patents  for  inventions  or  for  new  processes. 

No  person  may  be  given  exclusive  privilege  in  the 
United  States  to  manufacture  and  sell  an  article  unless  he 
has  obtained  a  patent  or  copyright. 

Patents. — Patents  may  be  issued  in  the  United  States 
to  ''any  person,  native  or  foreign,  who  has  invented  or 
discovered  any  new  and  useful  art,  machine,  manufac- 
ture, or  composition  of  matter,  or  any  new  and  useful 
improvement  thereof,  not  known  or  used  in  this  country, 
and  not  patented  or  described  in  any  publication  in  this 
or  any  foreign  country,  before  his  invention  or  discovery 
thereof,  and  not  in  public  use  or  on  sale  for  more  than  two 
years  prior  to  his  application,  unless  the  same  is  proved 
to  have  been  abandoned,  may,  upon  payment  of  the  fees 
required  by  law  and  other  due  proceedings  had,  obtain  a 
patent  thereof."  When  protected  by  a  patent  the  inventor 
or  discoverer  has  the  exclusive  right  to  manufacture  and 
sell  the  article  for  a  period  of  seventeen  years,  unless  the 
article  has  been  patented  abroad  previously,  in  which  case 
the  American  patent  ceases  with  the  expiration  of  the 
foreign  patent. 

Patents  have  been  the  cause  of  many  monopolies  in  the 
United  States;  even  when  the  patent  expires  the  original 
company  has  control  of  the  markets.  The  patent  laws  of 
the  United  States  are  justified  because  they  are  presumed 
to  stimulate  inventions.     Some  criticise  this  argument  by 


250  THE   ELEMENTS   OF  ECONOMICS 

stating  that  inventors  would  be  as  active  without  any 
patent  laws;  it  is,  however,  doubtful  whether  the  research 
and  experiment  necessary  to  perfect  a  valuable  invention 
would  be  given  without  the  possibiUty  of  obtaining  a 
patent.  Another  argument  is  that  it  would  be  difficult  to 
induce  any  one  to  invest  in  the  machinery  necessary  to 
produce  a  new  article  unless  some  protection  were  given. 
The  objection  that  the  inventor  frequently  makes  little 
out  of  his  patent,  the  lion's  share  going  to  the  manu- 
facturer, is  not  impressive.  It  is  not  the  fault  of  the  law 
if  inventors  make  poor  bargains  with  manufacturers. 

Another  objection  is  that  patents  may  be  purchased  by 
some  company  engaged  in  producing  a  similar  article  by 
another  process  and  may  never  be  used.  This  may  be 
prevented  by  a  law  providing  that  a  patent  shall  expire 
unless  it  is  utilized  within  a  reasonable  time,  say  five  years. 

Copyrights. — The  author  or  publishers  of  a  book  may 
secure  a  copyright.  This  gives  exclusive  privilege  to  pub- 
lish the  book  for  a  period  of  twenty-eight  years  and  the 
copyright  may  be  renewed  for  fourteen  years.  Without 
such  protection  any  one  could  publish  a  rival  edition  of 
a  successful  book  and  the  author  would  be  deprived  of 
profits.  Pictures  may  be  copyrighted  and  so  may  draw- 
ings. 

Privileges  of  copyright  are  extended  to  trade-marks. 
This  creates  no  monopoly,  but  protects  the  public  from 
unscrupulous  dealers  who  might  try  to  take  advantage  of 
another's  reputation,  gained  by  years  of  honest  endeavor. 

Public  Legal  Monopolies. — Public  legal  monopolies  are 
of  two  kinds:  (i)  Social  service  monopolies,  (2)  fiscal 
monopolies.     A   social   service   monopoly   is   one   that   is 


MONOPOLIES  251 

maintained  for  the  advantage  of  the  public  without  being 
primarily  conducted  for  revenue  purposes.  The  postal 
service  is  an  example  of  this  kind  of  monopoly. 

Fiscal  monopolies  are  those  operated  by  the  govern- 
ment for  the  purpose  of  the  revenue  which  they  produce. 
France,  for  example,  permits  no  competition  with  the 
State  manufacture  and  sale  of  tobacco.  The  tobacco 
business  is  operated  to  make  money  for  the  State  and  the 
results  are  not  different  from  what  they  would  be  if  the 
same  revenue  were  obtained  by  taxes  on  tobacco. 

Natural  Monopolies. — Natural  monopoUes  may  be  divi- 
ded into  two  classes:  (i)  Natural  monopolies  by  reason  of 
location,  (2)  natural  monopolies  on  account  of  the  nature 
of  their  business. 

Natural  Monopolies  of  Location. — Some  localities  have 
such  advantages  over  others  as  to  constitute  a  monopoly. 
The  best  point  from  which  to  view  Niagara  Falls  from  the 
American  side  is  Prospect  Point,  and  before  the  State  of 
New  York  acquired  this  site,  a  very  considerable  revenue 
was  obtained  by  the  private  company  which  controlled  it. 
The  ownership  of  the  sources  of  supply,  like  the  mineral 
springs  at  Saratoga  (now  owned  by  the  State  of  New 
York),  may  give  a  monopoly.  A  good  example  of  such  a 
monopoly  is  the  British  corporation  which  controls  the 
diamond-mines  of  South  Africa.  The  anthracite  coal 
monopoly  of  Pennsylvania  is  due  to  the  ownership  of  the 
sources  of  supply  by  a  few  large  corporations. 

If  the  owners  of  the  sources  of  supply  use  their  monopoly 
to  exact  an  unreasonable  price  from  consumers,  there  is  no 
question  of  the  right  of  the  government  to  regulate  prices, 
in  the  interest  of  the  public. 


252  THE  ELEMENTS   OF   ECONOMICS 

Natural  Monopolies  by  Nature  of  the  Business. — These 
monopolies  may  be  divided  into  two  classes:  (i)  Local 
monopolies,  (2)  general  monopolies.  Local  monopolies  are 
concerned  with  furnishing  such  pubUc  utilities  as  water, 
gas,  electricity,  and  street-railroad  transportation.  Gen- 
eral monopolies  furnish  such  services  as  railroad  trans- 
portation, telegraph,  and  express  service.  The  telephone 
is  chiefly  local,  though  not  exclusively  so.  In  all  these 
lines  of  business,  competition  tends  to  disappear  and 
monopoly  to  take  its  place. 

The  Water  Monopoly. — The  advantages  of  monopoly  in 
supplying  water  for  a  city  are  obvious.  One  system  of 
pipes  and  reservoirs  may  be  installed  and  operated  more 
cheaply  than  two.  Unnecessary  duplication  of  plants  costs 
money,  which  must  finally  be  paid  by  the  public  in  in- 
creased rates.  Even  though  one  company  is  given  com- 
plete monopoly  in  one  part  of  the  city  and  another  com- 
pany has  another  part  of  the  city,  there  is  a  duplication  of 
storage  facilities.  The  question  of  private  versus  public 
ownership  and  operation  is  still  an  open  one  in  regard  to 
most  public-service  monopolies,  but  not  with  regard  to 
water-supply.  It  has  been  settled  in  favor  of  public  own- 
ership and  operation.  A  pure  and  abundant  water-supply 
is  a  necessity  for  every  city  and  it  must  be  secured  at 
whatever  cost.  A  revenue  from  the  water-works  is  the 
last  thing  to  be  considered;  the  lives  of  the  citizens  are  im- 
periled if  money-making  is  a  chief  consideration.  Most  of 
the  large  cities  in  America  own  and  operate  their  water- 
works. 

Gas  and  Electric  Service. — The  gas  and  electric  services 
of  almost  every  city  in  the  United  States  are  monopolies. 


MONOPOLIES  253 

Competition,  if  established,  leads  to  consolidation.  The 
frequent  occurrence  of  the  words  ''consolidated,"  ''union," 
and  other  words  of  similar  meaning  in  the  names  of  gas 
companies,  shows  that  they  were  formed  through  the 
amalgamation  of  competing  companies.  The  unnecessary 
duplication  of  plants  must  be  paid  for  by  the  consumer. 
In  passing  upon  the  legality  of  rates  for  gas  and  electric 
service,  as  fixed  by  legislative  enactment  or  a  public-ser- 
vice commission,  the  courts  consider  that  a  corporation  is 
entitled  to  a  fair  return  on  the  capital  invested.  Attempts 
at  competition  increase  unnecessarily  investments  of  capi- 
tal and  make  prices  higher  than  they  otherwise  might  be. 
The  story  is  everywhere  the  same:  Two  companies  exist- 
ing at  the  same  time  will  compete  and  make  a  low  price; 
neither  can  make  money.  In  a  short  time  one  sells  out  to 
the  other,  or  they  consolidate  under  a  new  name  and  in 
the  end  the  public  pays  the  bill. 

The  Telephone  Business. — Though  the  telephone  busi- 
ness is  a  natural  monopoly,  the  tendency  toward  consolida- 
tion is  not  quite  so  strong  as  is  the  case  with  other  natural 
monopolies.  Competition  exists  in  hundreds  of  towns  and 
cities,  including  a  few  large  ones,  but  the  public  is  better 
served  by  a  monopoly.  Where  there  are  two  telephone 
companies  serving  the  same  district,  much  saving  would 
result  through  consolidation.  One  company  could  do  all 
the  business  and  save  by  reducing  the  expense  for  ex- 
changes, wires,  and  employees. 

Two  telephone  systems  are  inconvenient.  It  frequently 
happens  that  the  person  wanted  has  only  the  service  of  the 
rival  line.  Commercial  houses  must  subscribe  to  both 
lines  with  the  added  expenses  not  only  of  the  second  line, 


254  THE   ELEMENTS   OF   ECONOMICS 

but  the  space  required  and  the  extra  help  that  must  be 
employed. 

Street  Railroads. — The  street  railroads  show  the  same 
tendency  toward  consohdation  as  seen  in  other  natural 
monopolies.  Monopoly  saves  much  in  salaries  of  officials, 
in  economy  in  furnishing  power  from  one  or  two  large 
power  plants  instead  of  several  small  ones,  in  the  elimina- 
tion of  unnecessary  parallel  lines. 

Public  versus  Private  Ownership  of  Natural  Monopo- 
lies.— The  question  of  public  versus  private  ownership  of 
those  natural  monopolies  which  are  the  result  of  conditions 
inherent  in  the  business,  making  competition  self-destruc- 
tive, is  one  of  the  great  economic  problems  of  our  day. 
Advocates  of  municipal  ownership  present  arguments  like 
the  following: 

1.  Private  ownership  is  expensive.  Immense  losses 
result  from  unwise  attempts  at  competition. 

2.  A  municipality  being  free  from  any  possibility  of 
competition  may  charge  a  lower  rate  and  will  be  operated 
in  the  pubhc  interest  rather  than  for  private  gain. 

3.  Much  corruption  in  politics  comes  through  private 
corporations  seeking  franchises  and  other  privileges  from 
city  officials.  By  increasing  the  powers  of  municipal 
governments,  a  greater  interest  in  municipal  affairs  will  be 
created  and  a  better  class  of  men  will  be  elected  to  office. 

4.  The  success  of  municipal  ownership,  chiefly  in 
Europe,  is  cited  as  a  reason  for  extending  the  policy  of 
municipal  ownership. 

5.  It  is  claimed  that  experience  with  private  owner- 
ship shows  that  nothing  less  than  municipal  ownership 
and  operation  can  protect  the  interest  of  the  public. 


MONOPOLIES  255 

6.  Public  ownership  and  operation  would  prevent  the 
periodic  strikes,  which  under  private  operation  have  been 
costly  and  annoying  to  the  public. 

Against  municipal  ownership  and  operation  the  following 
arguments  are  advanced: 

1.  The  cities  do  not  conduct  their  present  activities 
with  that  degree  of  efficiency  which  would  justify  an  exten- 
sion of  their  powers.  Public  business  undertakings  are 
almost  always  conducted  at  greater  expense  and  with  less 
efficiency  than  private  undertakings. 

2.  Public  ownership  in  the  United  States  would  result 
in  more  spoils  for  the  politicians. 

3.  The  cities  would  not  make  profits,  but  would  lose. 
The  large  revenue  now  coming  to  the  cities  through  taxa- 
tion of  private  companies  would  cease,  and  if  there  were 
apparent  profits  they  would  not  equal  the  losses  in  tax- 
ation. 

4.  Private  ownership  is  more  progressive.  The  pri- 
vately owned  telephone,  gas,  and  street-railroad  lines  of 
the  United  States  are  superior  in  service  to  the  municipal 
plants  of  European  cities. 

5.  PubUc  regulation  as  to  rates  and  quality  of  service 
can  gain  all  the  advantages  of  public  ownership  without 
its  disadvantages. 

6.  Strikes  are  not  unknown  under  public  ownership. 
Public    Control    of    Natural    Monopolies. — If    natural 

monopolies  are  to  be  private  property,  they  must  be  sub- 
ject to  public  control.  Such  control  is  now  exercised  by 
public-service  commissions  in  most  American  states.  Such 
rules  as  the  following  are  recommended: 

I.     Franchises  should  be  granted  for  a  limited  term. 


256  THE   ELEMENTS   OF   ECONOMICS 

usually    not    exceeding    twenty-five   years    and    the    city 
should  be  paid  for  every  franchise  granted. 

2.  The  possessor  of  a  franchise  should  be  protected 
against  any  attempt  at  competition  by  having  an  exclusive 
right  to  furnish  service  within  the  city  or  a  part  of  it. 

3.  Quality  and  prices  should  be  regulated  by  law. 

4.  Financial  accounts  of  the  corporations  should  be 
matters  of  public  record. 

5.  When  the  franchise  expires,  all  rights  should  revert 
to  the  city. 

Limits  to  Regulation  of  Prices. — It  is  unwise  to  en- 
deavor to  compel  a  corporation  to  furnish  a  service  below 
the  cost  of  production.  No  corporation  can  secure  funds 
for  improvements  or  long  continue  to  give  adequate  ser- 
vice unless  it  can  pay  expenses  and  make  a  reasonable 
profit. 

The  Fourteenth  Amendment  to  the  Constitution  of  the 
United  States  reads  in  part:  ''Nor  shall  any  State  deprive 
any  person  of  life,  liberty,  or  property,  without  due  proc- 
ess of  law."  This  clause  has  been  invoked  chiefly  to 
prevent  state  legislative  bodies  from  depriving  corpora- 
tions of  their  earning  power  by  fixing  prices  below  a  reason- 
able figure,  though  the  common  view  when  it  was  enacted 
tvas  that  this  amendment  was  passed  to  protect  the  newly 
emancipated  slaves.  Corporations  are  "artificial  persons" 
in  the  meaning  of  the  law  and  as  such  are  entitled  to  pro- 
tection under  the  Fourteenth  Amendment.  In  1909  the 
Supreme  Court  of  the  United  States  decided  that  a  state 
law  fixing  the  price  of  gas  in  New  York  City  at  eighty 
cents  a  thousand  feet  was  constitutional.  In  arriving  at 
this  decision  the  court  held  that  the  New  York  Consoli- 


( 


MONOPOLIES  257 

dated  Gas  Company  was  entitled  to  a  return  of  6  per  cent 
— that  being  at  the  time  the  customary  rate  of  interest  in 
New  York — on  the  value  of  its  property.  Several  other 
decisions  of  the  Supreme  Court  indicate  that  a  legislative 
body  cannot  fix  prices  below  a  '' reasonable"  rate  and  that 
a  reasonable  rate  means  a  rate  which  will  provide  for  meet- 
ing expenses  and  yield  a  fair  return  on  the  investment. 

The  Supreme  Court  of  the  United  States  handed  down 
two  important  decisions  on  April  11,  1921,  both  of  which 
denied  to  municipaUties  the  right  to  fix  rates  for  services 
rendered  by  corporations  at  less  than  enough  to  pa}' 
expenses  and  yield  a  reasonable  profit.  The  first  case 
affirmed  a  decree  of  the  Texas  district  court  enjoining 
the  City  of  San  Antonio  from  enforcing  a  five-cent  fare 
over  the  lines  of  the  San  Antonio  Public  Service  Company. 
In  appealing  from  the  decision  of  the  Texas  court,  the 
city  asserted  that  its  franchise  contract  with  the  railroad 
called  for  service  at  five  cents  and  that  the  courts  were 
without  jurisdiction  to  interfere. 

The  second  case  set  aside  an  injunction  obtained  from  a 
lower  court  by  the  City  of  Fairfield,  Iowa,  restraining  the 
Iowa  Electric  Company  from  increasing  its  rates  above 
those  set  in  its  franchise. 

It  is  good  law  therefore  as  well  as  good  economics  to 
say  that  no  corporation  can  be  expected  to  furnish  a  ser- 
vice at  less  than  cost,  including  a  fair  return  on  the  capital 
invested. 

Railroad  Monopolies. — In  the  chapter  entitled  ''Trans- 
portation," we  have  seen  how  the  railroads  of  the  United 
States  were  consolidated  into  great  systems.  In  1906 
there  were  seventeen  of  these  systems  controlling  176,000 


258  THE   ELEMENTS   OF  ECONOMICS 

miles  of  railroad,  out  of  a  total  of  228,000  miles.  The 
more  important  systems  were  the  Vanderbilt  group  (21,333 
miles),  the  Hill  group  (21,303  miles),  the  Pennsylvania 
group  (20,182  miles),  the  Harriman  group  (19,182  miles), 
the  Morgan  group  (17,810  miles),  and  the  Gould  group 
(16,902  miles).* 

Railroad  consolidations  were  brought  about  by  pur- 
chase, ownership  of  a  controlling  interest  in  shares,,  or  by 
lease.  Each  section  of  the  United  States  was  served  by 
one  of  these  groups  and  there  was  no  competition.  The 
transcontinental  and  great  trunk  lines  had  agreements 
with  each  other  that  prevented  competition  on  long-dis- 
tance hauls.  To  remedy  abuses  the  Interstate  Commerce 
Commission  was  created. 

The  Transportation  Act  of  1920. — This  act  originated  a 
new  policy  in  dealing  with  the  railroads.  It  recognizes 
that  they  are  monopolies  and  treats  them  as  such.  The 
Interstate  Commerce  Commission,  increased  to  eleven 
members  by  the  act,  expressly  permits  pooling  of  freights 
and  division  of  profits  among  the  railroads.  It  does  more. 
It  requires  the  commission  to  prepare  and  adopt,  as  soon  as 
practicable,  a  plan  for  the  consolidation  of  railroad  proper- 
ties of  the  continental  United  States  into  a  limited  number 
of  systems.  The  act  authorizes  the  railroads,  with  the 
approval  of  the  commission,  to  consolidate  their  properties 

*  These  names  were  not  used  officially.  The  Vanderbilt  group,  for 
example,  included  the  following  railroads:  New  York  Central  and  Hudson 
River;  Lake  Shore  and  Michigan  Southern;  New  York,  Chicago,  and  St. 
Louis;  Michigan  Central;  Delaware  and  Hudson;  Cleveland,  Cincinnati, 
Chicago,  and  St.  Louis;  Chicago  and  Northwestern;  Chicago,  St.  Paul, 
Minneapolis,  and  Omaha;  Fremont,  Elkhorn,  and  Missouri  Valley;  Dela- 
ware, Lackawanna,  and  Western;  Lake  Erie  and  Western;  Pittsburg  and 
Lake  Erie;  Indiana,  Illinois,  and  Iowa. 


MONOPOLIES  259 

or  any  part  of  them.  The  commission  is  authorized  to 
fix  rates  so  that  the  companies  may  receive  a  fair  return 
on  their  investments. 

Government  Control  of  Raihroads. — The  arguments  in 
regard  to  government  ownership  of  railroads  do  not  differ 
from  those  given  in  the  discussion  of  municipal  monopolies 
and  set  forth  in  the  chapter  devoted  to  transportation. 
The  Transportation  Act  of  1920  shows  that  the  immediate 
policy  of  the  United  States  will  be  private  ownership  of 
railroads  subject  to  government  control.  The  chief  fea- 
tures of  the  Act  of  1920  are: 

1.  Strong  government  control.  This  includes  fixing  of 
rates  and  preventing  all  discrimination.  No  one  may 
receive  lower  rates  or  better  service  than  another,  nor 
shall  one  city  receive  lower  rates  than  another  similarly 
situated. 

2.  Railroads  engaged  in  interstate  business  are  for- 
bidden to  issue  stock  or  bonds  or  other  securities  without 
obtaining  the  consent  of  the  commission. 

3.  Rates  are  fixed  so  that  railroad  companies  may 
receive  a  fair  return  on  their  investments.  This  will 
attract  private  capital  and  enable  the  railroads  to  secure 
money  for  necessary  improvements  and  equipment. 

Trusts,  or  Capitalistic  Monopolies 

What  is  a  Trust? — The  original  trust  was  the  Standard 
Oil  Trust.  It  was  formed  in  1882  by  several  companies 
placing  their  stock  in  the  hands  of  nine  trustees  who  man- 
aged the  business  of  the  constituent  companies.  This 
plan   of  organization  was   called   a   trust.     Between   the 


26o  THE   ELEMENTS   OF   ECONOMICS 

years  1882  and  1890  many  combinations  of  business  cor- 
porations were  formed  on  the  trust  plan.  The  trust  plan 
became  illegal  with  the  passage  of  the  Sherman  Anti- 
Trust  Law  of  1890,  but  the  word  ''trust"  came  to  be 
applied  to  any  combination  or  monopoly.  Professor 
Lippincott  suggests  that  there  is  logical  sequence  in  the 
developing  of  the  use  of  this  term.  It  was  at  first  used 
in  a  legal  sense,  applying  to  stocks  placed  in  the  hands 
of  trustees.  Since  these  trusts  were  combinations  of 
business  enterprises,  the  term  began  to  be  applied  to  all 
combinations  whether  formed  on  the  trust  plan  or  other- 
wise. Then,  since  combinations  were  usually  formed  to 
create  monopolies  the  term  began  to  be  applied  to  monopo- 
lies of  all  kinds. 

The  term  trust,  or  capitalistic  monopoly,  is  used  by 
economists  as  applying  to  monopolies  that  are  not  natural 
monopoHes,  but  are  the  result  of  vast  capital  controlled 
by  a  few  persons.  For  example,  the  making  of  cameras  is 
not  a  business  which  naturally  becomes'  a  monopoly,  but 
it  may  become  a  monopoly  by  some  great  corporation 
getting  control  of  all  the  manufacturing  plants  which  make 
cameras. 

Anti-Trust  Laws. — Public  sentiment  was  against  trusts, 
and  in  1888  the  platforms  of  both  great  political  parties 
contained  anti-trust  planks.  The  Sherman  Anti-Trust 
Act  of  1890  followed.  This  act  declared  all  combinations 
in  restraint  of  trade  illegal.  Most  of  the  states  passed 
similar  acts. 

The  Standard  Oil  Trust,  the  American  Tobacco  Com- 
pany, and  several  other  combinations  were  prosecuted  and 
required  to  dissolve.     They  promptly  reorganized  under 


MONOPOLIES  261 

other  forms  and  their  control  of  business  was  in  no  way 
lessened.  The  first  anti-trust  laws  were  directed  against 
the  form  of  organization.  Recently  more  attention  has 
been  given  to  methods  of  doing  business. 

In  1914  the  Clayton  Act  was  passed.  The  chief  pro- 
visions of  this  act  are: 

1.  Certain  business  practices  are  declared  illegal. 
These  include  giving  favors  to  one  purchaser  which  are 
denied  another  under  similar  conditions.  Selling  goods  to 
a  dealer  on  condition  that  he  will  not  purchase  any  goods 
from  a  competitor  is  pronounced  illegal. 

2.  Interlocking  directorates,  or  having  the  same  direc- 
tors in  competing  companies,  is  prohibited  to  companies 
engaged  in  interstate  commerce  if  the  capital  of  these 
companies  exceeds  $1,000,000. 

3.  One  company  cannot  acquire  the  stock  of  a  com- 
peting company. 

4.  Combinations  of  laborers  and  farmers  are  exempted 
from  the  provisions  of  the  act  and  may  not  be  prosecuted 
under  the  Sherman  Act. 

The  Federal  Trade  Commission  Act  of  19 14  provided  a 
commission  of  five  persons  to  be  nominated  by  the  Presi- 
dent. This  commission  has  the  power  to  investigate  any 
case  of  unfair  competition  and  may  order  any  person  or 
corporation  to  desist  from  unfair  competition.  The  com- 
mission has  authority  to  present  cases  of  unfair  competi- 
tion to  the  courts  for  trial. 

Summary. — The  absence  of  competition  constitutes 
monopoly.  Monopoly  does  not  necessarily  imply  exorbi- 
tant prices.  Prices  are  arranged  under  monopoly  to  give 
the   largest   possible   profits.     Personal   monopolies   exist 


262  THE   ELEMENTS   OF   ECONOMICS 

when  a  person  has  unique  ability.  An  opera-singer  may 
receive  a  monopoly  price  for  his  services.  Such  monopolies 
never  last  long,  as  acquired  powers  are  not  transmitted 
to  descendants.  Patents  and  copyrights  create  monopo- 
lies for  a  limited  time.  Natural  monopolies  exist  either 
because  of  control  of  the  source  of  supply  or  because  of 
the  nature  of  the  business  conducted  by  a  corporation. 
Natural  monopolies  should  be  recognized  as  monopolies 
and  competition  should  not  be  encouraged.  The  public 
may  either  own  and  operate  natural  monopolies  or  permit 
private  companies  to  own  and  operate  them,  subject  to 
public  control. 

Capitalistic  monopolies  should  be  subject  to  such  con- 
trol as  will  prevent  unfair  competition.  A  company  is  not 
an  evil  because  it  is  large,  nor  a  blessing  because  it  is 
small.  The  Clayton  Act  and  the  Federal  Trade  Com- 
mission are  designed  to  prevent  unfair  competition. 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1.  What   persons   whom   you   know   possess   monopoly   ability? 

What  persons  of  whom  you  have  heard  receive  large  fees  or 
salaries  because  of  the  possession  of  unusual  ability? 

2.  Do  private  companies  or  the  city  own  the  water- works  which 

supply  your  city  with  water?  .Is  the  service  satisfactory? 

3.  Do  you  favor  city  ownership  of  the  street  railroads  of  your 

city?     Why? 

4.  What  objections  are  there  to  the  granting  of  railroad  passes  to 

private  individuals?  to  pubHc  officials? 

5.  Do  the  electric  railroads  of  your  vicinity  compete  with  the 

steam  railroads?     Do  automobile  trucks  compete  with  rail- 
roads ?     What  has  been  the  effect  ? 


CHAPTER  XXIV 
RENT 

Definition  of  Rent. — The  word  *^rent,"  as  used  by  most 
persons,  refers  to  a  sum  of  money  paid  for  the  use  of  any 
article.  The  economist  limits  rent  to  payment  for  the 
use  of  land.  Money  paid  for  the  use  of  capital  is  interest, 
not  rent.  Economic  rent  is  the  income  which  land  affords 
as  its  share  in  the  production  of  wealth. 

Some  lands  are  more  fertile  than  others.  We  may 
imagine  land  so  poorly  suited  to  raising  wheat  that  the 
crop  will  merely  pay  the  cost  of  labor,  seed,  and  interest 
on  the  capital.  This  land  would  be  the  margin  of  cultiva- 
tion for  wheat.  There  would  be  nothing  for  rent.  On  an- 
other piece  of  land  the  same  amount  of  labor  and  capital 
will  pay  all  expenses  and  afford  a  surplus  of  fifteen  bushels 
per  acre.  The  difference  is  not  due  to  superior  use  of  labor 
and  capital,  for  we  have  assumed  they  are  equal  in  each 
case.  The  superiority  of  the  land  accounts  for  the  larger 
yield.  Location  makes  some  lands  better .  than  others. 
Land  which  is  near  a  market  is  better  than  distant  lands. 
Advantage  of  location  is  frequently  great  enough  to  over- 
come advantage  of  fertility.  For  example,  the  soil  in  the 
Red  River  Valley  of  North  Dakota  is  superior  to  the  soil 
of  eastern  Long  Island,  but  Long  Island  land  commands 
larger  rents  because  of  proximity  to  New  York  City. 

The  rent  of  agricultural  land,  it  is  seen,  depends  upon 
two  things:  fertility  of  the  soil  and  proximity  to  market. 

263 


264  THE   ELEMENTS   OF   ECONOMICS 

It  should  be  noted  that  economic  rent  exists  whether  the 
land  is  cultivated  by  the  owner  or  is  leased  to  a  tenant. 

Land  on  the  Margin  of  Cultivation. — ^Any  piece  of  land 
is  capable  of  many  uses.  The  tendency  is  to  put  the  land 
to  that  use  for  which  it  is  best  suited.  Land  near  a  city 
will  be  used  for  truck  farming  because  this  employment  of 
the  land  pays  best.  More  distant  lands  will  be  more 
profitably  employed  in  raising  wheat  or  general  farming. 
The  point  where  it  is  a  matter  of  indifference  to  the  farmer 
ivhether  he  engages  in  truck  farming  or  general  farming  is 
the  margin  of  cultivation  for  truck  farming.  There  is  rent 
afforded  for  this  marginal  land  when  devoted  to  truck 
farming,  because  it  must  pay  as  much  for  truck  farming  as 
it  would  pay  if  devoted  to  general  farming.  The  poorer 
lands  used  in  general  farming  may  be  used  for  grazing. 
These  lands  must  afford  the  same  rent  for  agricultural 
purposes  that  they  would  yield  if  devoted  to  grazing. 

It  is  seen  that  economic  rent  consists  of  two  elements — 
marginal  rent,  or  the  rent  paid  for  the  poorest  land  actu- 
ally used  for  any  purpose,  and  differential  rent,  which 
measures  the  difference  between  marginal  land  and  better 
lands. 

Is  There  "No-Rent  Land"? — Economists  speak  of  *' no- 
rent  land."  This  land  is  too  poor  to  produce  more  than  a 
bare  living.  The  cultivator  of  ''no-rent  land"  can  only 
support  himself  and  therefore  there  is  nothing  left  for  rent. 
There  are  such  lands  in  cultivation,  even  though  better 
lands  are  idle.  This  is  because  of  the  ignorance,  shiftless- 
ness,  or  lack  of  ambition  of  the  farmer. 

Rents  of  Agricultural  Lands  Do  Not  Affect  Prices. — Let 
us  imagine  an  island  in  the  Southern  Seas.     The  land  of 


RENT 


265 


this  island  is  most  fertile  in  the  north  and  regularly  declines 
in  fertility  as  we  approach  the  south.  Along  comes  Robin- 
son Crusoe  and  takes  possession  of  a'part  of  the  most  fertile 
land,  which  is  capable  of  yielding  forty  bushels  of  wheat 


to  the  acre.  The  land  is  free  and  no  rent  is  paid.  Soon 
Friday  lands  and  occupies  an  adjoining  strip  of  land.  Still 
no  rent  is  paid  as  there  is  abundance  of  equally  fertile  land 
unoccupied-  So  long  as  there  is  demand  for  only  that 
amount  of  wheat  that  can  be  raised  on  the  best  land  and 
there  is  still  a  portion  of  the  best  land  to  be  had  for  the 


266  THE  ELEMENTS  OF  ECONOMICS 

asking  there  will  be  no  rent.  But  the  population  grows 
and  soon  the  best  land  is  all  occupied  and  there  is  demand 
for  more  wheat  than  can  be  raised  on  the  best  land.  If  the 
cost  of  production  is  eighty  cents  per  bushel  on  the  land 
which  produces  forty  bushels  to  the  acre,  the  thirty-bushel 
land  will  not  be  used  until  the  price  of  wheat  rises  to  about 
$1.07  a  bushel,  because  the  same  amount  of  labor  and 
capital  is  required  to  produce  thirty  bushels  on  the  poorer 
land  as  would  produce  forty  bushels  on  the  best  land.  As 
soon  as  the  price  of  wheat  rises  enough  to  make  it  profit- 
able to  cultivate  the  thirty-bushel  land,  the  better  land 
will  command  a  rental  of  ten  bushels  to  the  acre,  because 
a  farmer  could  as  well  afford  to  pay  ten  bushels  rent  for 
the  best  land  as  to  raise  thirty  bushels  on  the  no-rent  land. 
Moreover  he  would  have  superior  social  advantages  on 
the  better  land  as  he  would  be  near  Crusoeville  where  there 
is  a  general  store,  a  school,  a  church,  and  '' movies"  on 
Saturday  night. 

In  like  manner  when  the  demand  for  wheat  exceeds 
180,000  bushels  a  year,  the  price  of  wheat  will  rise  until 
it  becomes  profitable  to  cultivate  the  twenty-bushel  land 
and  now  the  forty-bushel  land  will  afford  a  rent  of  twenty 
bushels  per  acre  and  the  thirty-bushel  land  will  command 
a  rent  of  ten  bushels  per  acre.  From  the  illustration  it  is 
seen  that  prices  are  not  high  because  rent  is  paid,  but  rent 
is  paid  because  prices  are  high. 

Do  Agricultural  Rents  Always  Rise? — It  might  be 
thought  that  rents  of  agricultural  land  will  continually  rise 
as  population  increases.  Such  is  not  the  case — new  and 
rich  agricultural  lands  may  be  opened  to  cultivation. 
These  will  raise   the  margin  of  cultivation  and  tend  to 


From  photographs  by  Brown  Brothers. 

A  CITY  APARTMENT-HOUSE  AND  A  SUBURBAN  HOUSE 

The  apartment-house  will  accommodate  seventy  families  without  overcrowding. 
It  does  not  pay  to  erect  such  apartment-houses  except  where  land  rent^  are  high. 

267 


268  THE   ELEMENTS  OF  ECONOMICS 

lower  rents.  Improvements  in  the  science  of  agriculture 
may  make  lands  productive  which  were  once  thought 
useless.  Swamps  may  be  drained  and  dry  lands  may  be 
made  productive  by  irrigation.  Rents  of  agricultural  land 
in  New  England  have  fallen  with  the  opening  of  rich 
western  land  and  it  no  longer  pays  to  grow  wheat  in  New 
England. 

Urban  Rents. — Locationisthe  one  thing  that  affects  rents 
in  cities.  The  land  in  the  centre  of  the  city  always  com- 
mands the  highest  rents.  The  centre  of  the  city  is  always 
devoted  to  business.  Some  portions  are  more  desirable 
than  others  and  for  this  reason  rent  for  larger  amounts. 
If  you  were  considering  opening  a  clothing  store  in  a  city, 
you  might  find  that  the  best  available  location  would  re- 
quire $20,000  a  year  rent  for  the  land.  Another  piece  of 
land  might  be  rented  for  $5,000  a  year.  The  $20,000  plot 
might  be  the  better  bargain  because  the  sales  would  much 
exceed  those  that  could  be  made  in  the  cheaper  section  of 
the  city.  Ten  thousand  sales  at  an  average  profit  of  $5 
per  sale  in  the  better  location  would  yield  a  gross  return 
of  $50,000.  After  paying  $20,000  rent  there  would  be  left 
$30,000.  Out  of  this  sum  perhaps  $5,000  would  be  taken 
for  the  services  of  clerks  who  would  not  be  required  in  the 
cheaper  location.  In  the  cheaper  section  of  the  city  2,000 
sales  at  a  profit  of  $5  per  sale  might  be  made.  This  would 
produce  a  gross  return  of  $10,000,  and  after  paying  rent 
there  would  be  only  $5,000  left.  It  is  seen  from  the  above 
illustration  that  high  rents  do  not  necessarily  mean  high 
prices. 

Within  the  business  section  of  a  city,  rentals  vary  from 
place  to  place.     The  business  which  can  afford  to  pay  the 


RENT  269 

highest  prices  gets  the  best  locations.  Outside  the  busi- 
ness portion  of  the  city  lies  a  belt  which  may  be  used  for 
manufacturing,  trade,  or  residences.  This  belt  may  be 
regarded  as  the  margin  for  purposes  of  trade.  Near  the 
railroads  or  water  are  the  best  sites  for  manufacturing. 

Rents  for  residence  purposes  differ  with  the  demand  for 
land  in  each  section.  Land  used  for  poor  tenements  may 
command  a  high  rent  because  of  the  income  which  may 
be  obtained  from  such  tenements.  Land  in  the  fashionable 
section  of  the  city  will  yield  high  rent  because  people  are 
willing  to  pay  high  prices  for  it.  On  the  other  hand  there 
may  be  ''no-rent  land"  on  the  outskirts  of  the  city  where 
"squatters"  are  living  on  land  in  little  hovels  of  their 
own  construction  and  from  which  the  owners  of  the  land 
do  not  take  the  trouble  to  evict  them  because  for  the 
present  there  is  no  profitable  use  to  which  the  land  may 
be  put. 

Changes  in  Urban  Rents. — Rent  of  urban  lands  does  not 
continually  rise  as  is  often  supposed.  Changes  in  lines  of 
transportation  and  changes  in  the  population  of  a  section 
of  a  city  may  cause  rents  to  fall.  The  erection  of  a  jail  or 
a  hospital  often  depresses  the  value  of  adjoining  land.  The 
building  of  the  Brooklyn  Bridge  caused  rents  to  fall  in 
sections  of  Brooklyn  that  had  been  on  lines  of  communica- 
tion with  the  ferries  and  caused  rents  to  rise  on  the  new  lines 
of  communication  with  Manhattan  Island.  New  suburbs 
made  available  by  new  means  of  transportation  may  cause 
rents  to  fall  in  certain  residential  sections  of  a  city. 

Summary. — Economic  rent  is  the  payment  for  the  use 
of  land,  mines,  water-power,  or  other  natural  agents  of 
production.     Two  items  enter  into  the  rent  of  agricultural 


270  THE   ELEMENTS   OF   ECONOMICS 

land.  They  are  fertility  of  the  soil  and  location.  The 
poorest  land  actually  used  for  raising  any  agricultural 
product  is  the  margin  of  cultivation  for  that  product. 
There  may  be  rent  paid  for  the  use  of  this  poorest  land  or 
it  may  be  no-rent  land.  The  rent  of  better  lands  varies 
with  the  advantages  they  afford.  Rent  is  not  the  cause  of 
high  prices  of  farm  products,  because  poorer  lands  are  not 
cultivated  until  rise  in  prices  makes  it  profitable  to  till 
these  lands.  Rents  of  agricultural  lands  do  not  always 
rise  with  increase  of  population  as  the  margin  of  cultiva- 
tion may  be  raised  by  new  and  fertile  lands  being  opened 
to  cultivation.  Rents  of  city  lands  depend  wholly  upon 
location.  The  rents  of  these  lands  depend  upon  what 
people  are  willing  to  pay  for  them  for  business  purposes  or 
for  residences.  High  rents  for  stores  do  not  necessarily 
mean  high  prices.  Rent  of  urban  lands  is  measured  by 
the  degree  of  superiority  of  the  land  in  question  over  the 
poorest  land  devoted  to  the  same  use.  Rents  of  urban 
land  rise  or  fall  with  changes  in  the  desirability  of  such 
land. 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1.  Do  you  know  of  any   "no-rent  land"  in  your  community? 

Have  there  been  any  recent  changes  in  rental  values  in  your 
city?     What  has  caused  these  changes? 

2.  Some  retail  dealers  advertise  that  they  can  sell  goods  cheaper 

than  others  because  they  pay  less  rent.     Are  such  claims 
always  well  taken?    Are  they  sometimes  true?     Explain. 

3.  What  portions  of  the  business  section  of  your  city  rent  for  the 

highest  amounts?     Why?     Why  are  rents  on  one  side  of  a 
street  sometimes  higher  than  those  on  the  opposite  side? 


RENT  271 

4.  Ask  some  old  resident  of  your  city  what  was  the  fashionable 

part  of  your  city  for  residence  purposes  forty  years  ago. 
What  changes  have  occurred  since  then? 

5.  Give  an  example  of  the  rise  and  fall  of  rents  in  urban  property. 

In  agricultural  lands. 

6.  Suppose  that  60,000  bushels  of  potatoes  are  required  'to  sat- 

isfy the  wants  of  a  small  city  and  10,000  bushels  are  sup- 
plied by  one  farmer.  Suppose  further  that  this  farmer, 
owm'ng  his  own  land,  should  decide  to  sell  his  potatoes 
without  including  any  charge  for  rent  and  without  regard 
to  the  current  scale  of  prices.  What  would  be  the  effect 
(i)  upon  other  producers  of  potatoes?  (2)  upon  prices? 
(3)  upon  supply? 


CHAPTER  XXV 

WAGES 

Wages  are  the  laborer's  share  in  the  products  of  industry. 
They  are  advanced  by  the  employer  before  the  goods  are 
sold  but  they  must  finally  come  out  of  the  product.  Labor 
in  the  economic  sense  includes  all  efforts,  whether  of  mind 
or  body,  devoted  to  the  creation  of  wealth.  The  salary  of 
a  superintendent  of  a  mine  is  a  wage  just  as  is  the  pay  of 
a  miner.  Wages  may  vary  from  a  hundred  thousand 
dollars  a  year  paid  to  a  railroad  president  to  a  few  dollars 
a  day  paid  to  a  section-hand. 

Limits  of  Wages. — Since  wages  are  paid  out  of  the  prod- 
ucts of  industry,  it  is  apparent  that  in  the  long  run  a 
laborer  cannot  receive  more  wages  than  the  value  he  adds 
to  the  article  he  produces.  The  lowest  hmit  of  wages  is 
an  amount  barely  sufficient  to  support  the  laborer  and  his 
family.  Should  wages  fall  below  the  point  of  subsistence 
there  will  be,  in  the  long  run,  fewer  laborers  and  therefore 
wages  must  rise.  The  lower  limit  of  wages  is  seldom  fixed 
at  the  point  of  subsistence.  Usually  it  is  fixed  by  the 
standard  of  living.  At  any  one  time  the  laborers  in  any 
employment  are  accustomed  to  a  certain  amount  of  neces- 
saries, comforts,  and  luxuries.  This  is  their  standard  of 
living  and  they  will  not  abandon  it  without  a  struggle. 
The  standard  of  living  cannot  affect  wages  except  as  it 
influences  the  supply  of  labor.  So  long  as  laborers  will 
not  marry  unless  they  can  maintain  a  high  standard  of 

272 


WAGES  273 

living,  wages  will  be  high.  The  standard  of  living  may 
be  lowered  by  a  succession  of  years  of  depression  in  indus- 
try, or  by  immigrants  who  will  work  for  a  lower  wage  and 
who  have  a  low  standard  of  living. 

The  supply  of  labor  does  not  rapidly  change  and  there 
is  a  possibility  that  the  children  of  laborers  may  grow  up 
with  a  lower  standard  than  their  parents  had  maintained 
in  more  prosperous  years.  On  the  other  hand,  the  stand- 
ard of  living  may  rise,  as  it  has  steadily  risen  in  the  United 
States.  With  more  education  and  better  training,  the 
laborers  have  a  broader  outlook  and  are  better  producers. 
They  receive  higher  wages  because  they  earn  them,  and 
not  by  reducing  the  shares  which  belong  to  other  members 
of  the  community. 

Real  and  Nominal  Wages. — The  money  which  laborers 
receive  for  their  services  is  nominal  wages.  Real  wages 
are  the  goods  and  services  which  the  money  will  buy.  To 
show  that  nominal  wages  in  1920  were  double  nominal 
wages  in  191 4  does  not  show  that  the  laborers  were  more 
prosperous.  A  fall  in  nominal  wages  may  be  accompanied 
by  a  rise  in  real  wages. 

Wages  in  different  countries  and  in  different  parts  of  the 
same  country  cannot  be  compared  accurately  except  in 
terms  of  real  wages.  A  school-teacher  in  New  York  or 
Chicago  who  receives  $2,500  a  year  may  receive  less  real 
wages  than  a  country  school-teacher  who  receives  $1,000 
a  year. 

The  Demand  and  Supply  of  Labor. — ^Wages  at  any  time 
depend  upon  the  demand  and  supply  of  labor.  Demand 
for  labor  is  sometimes  a  demand  for  the  direct  services  of 
labor.     This  is   the  case  with  personal  services  such  as 


274  THE   ELEMENTS   OF   ECONOMICS 

rendered  by  barbers,  domestic  servants,  physicians,  and 
musicians.  More  often  it  is  not  labor  that  is  desired,  but 
the  articles  which  labor  will  produce. 

The  demand  for  labor  varies  with  the  price  of  labor.  At 
any  one  time  there  is  a  certain  wage.  Let  the  wage  rise 
and  demand  is  lessened,  or  let  wages  fall  and  the  demand 
is  increased.  For  example,  if  wages  are  five  dollars  a  day, 
an  entrepreneur  can  place  goods  upon  the  market  to  sell  at 
a  certain  price.  If  wages  rise  to  eight  dollars  a  day,  the 
entrepreneur  must  sell  his  goods  at  a  higher  price,  which 
will  reduce  the  demand  for  the  goods  and  consequently  the 
demand  for  labor.  If  the  demand  for  the  goods  is  elastic 
the  effect  upon  the  demand  for  labor  is  soon  felt. 

When  wages  are  high  there  is  a  tendency  to  supplant 
labor  by  machinery.  For  example,  if  farm  labor  is  expen- 
sive, it  pays  to  have  ploughing  done  by  a  gang-plough  drawn 
by  a  tractor.  The  substitution  of  machinery  for  labor,  it 
should  be  noted,  does  not  decrease  the  demand  for  labor  in 
general,  but  only  for  a  particular  kind  of  labor  at  a  certain 
time.  The  demand  for  labor  at  any  one  time  depends 
upon  the  amount  of  capital  available.  If  capital  is  scarce 
there  is  less  demand  for  labor  than  when  it  is  abundant. 
The  economic  depression  in  Europe  following  the  Great 
War  was  chiefly  because  of  the  lack  of  capital. 

Time  Wages. — Time  wages  are  paid  for  the  time  spent 
in  work.  Time  wages  may  be  paid  by  the  hour,  day,  week, 
or  month.  Time  wages  are  based  upon  the  theory  that 
the  average  workman  produces  so  much  in  a  given  time. 
No  advantage  is  given  to  the  especially  efficient  workman 
unless  he  attracts  the  attention  of  a  foreman  and  is  listed 
for  promotion.     Time  wages  tempt  some  workmen  to  do 


WAGES  275 

as  little  as  they  can  without  incurring  the  penalty  of  dis- 
charge. 

Piece  Wages. — Piece  wages  are  paid  for  the  amount  of 
work  done.  The  wage  is  a  definite  payment  for  a  definite 
service.  This  method  of  payment  discourages  loafing  on 
the  job,  but  there  is  a  tendency  to  speed  up  work  and  the 
employer  sometimes  fixes  piece  wages  at  a  rate  that  will 
give  a  living  wage  to  only  the  most  efficient.  If  the  em- 
ployer sees  that  a  man  is  making  ten  dollars  a  day,  he  may 
think  of  it  as  a  day's  wage  rather  than  as  a  payment  for 
ten  dollars'  worth  of  work  and  is  tempted  to  cut  the  piece 
wage.  Piece  wages  are  objectionable  if  they  overwork  the 
employees.  ** Piece-work  is  the  work  that  kills"  is  an  old 
saying. 

Rate-of-Service  Wages. — ^There  are  many  varieties  of 
rate-of-service  wages,  but  all  include  a  time  wage  with  a 
bonus  for  increased  production.  Rate-of-service  wages  are 
therefore  a  combination  of  time  wages  and  piece  wages. 
This  is  hot  profit-sharing  because  the  bonus  is  paid  for 
time  saved  and  not  out  of  profits.  At  its  best  this  system 
provides  a  living  wage  as  a  base,  with  a  bonus  for  increased 
efficiency. 

Non-Competitive  Groups. — The  workers  of  a  country 
may  be  divided  into  five  fairly  distinct  groups.  The  first 
group  consists  of  unskilled  manual  laborers.  Competition 
is  strong  within  this  group,  .as  it  is  easy  to  shift  from  one 
kind  of  unskilled  work  to  another.  Wages  tend  to  be  the 
same  within  the  group.  If  wages  should  be  higher  in  one 
employment  than  another,  competition  among  workers  for 
the  higher-paid  employment  will  depress  wages.  If  one 
employment  is  underpaid  as  compared  to  another,  work- 


276  THE   ELEMENTS  OF   ECONOMICS 

men  cannot  readily  be  obtained  in  that  employment  and 
wages  must  rise.  The  next  higher  group  is  that  of 
skilled  laborers.  There  is  no  competition  with  the  lower 
group  and  within  this  group  there  is  less  competition  than 
within  the  group  of  unskilled  laborers.  Wages  are  higher 
than  in  the  lower  group,  as  the  number  of  skilled  laborers 
is  less  than  the  number  of  unskilled  men.  The  tendency 
is  for  wages  within  the  group  to  vary  with  the  skill  required. 

The  third  group  is  composed  of  ordinary  mental  work- 
ers such  as  clerks,  salesmen,  and  keepers  of  small  shops. 
Wages  in  this  group  may  be  greater  or  less  than  in  the 
group  of  skilled  manual  laborers.  The  fourth  group  con- 
sists of  most  business  and  professional  men.  Competition 
within  the  group  is  strong,  but  there  is  no  competition 
with  those  outside  of  the  group.  The  last  group  is  com- 
posed of  men  of  unusual  ability.  Because  of  their  excep- 
tional ability  they  have  a  monopoly  advantage.  Great 
business  men,  eminent  surgeons,  actors  of  rare  ability 
are  among  those  who  belong  to  this  group.  There  is 
less  competition  within  this  group  than  within  any  of 
the  other  groups  and  there  is  little  or  no  competition  by 
members  of  lower  groups. 

Members  of  a  higher  group  may  be  pushed  temporarily 
into  a  lower  group  by  an  industrial  depression  or  some 
other  unusual  condition,  but  each  man  tends  to  remain 
within  the  group  for  which  his  ability  and  training  fit  him. 
Men  rise  from  one  group  to  another  as  they  gain  in  ex- 
perience and  ability.  At  any  one  time  within  each  group 
wages  depend  upon  supply  and  demand. 

Adam  Smith's  Reasons  for  Differences  in  Wages. — In 
his  Wealth  of  Nations,  Adam  Smith  gives  five  reasons  for 


WAGES  277 

wages  being  different  in  various  employments.     Wages,  he 
says,  vary  with: 

I.  The  agreeableness  or  disagreeableness  of  the  employ- 
ments themselves. 

II.  The  easiness  and  cheapness,  or  the  difficulty  and 
expense,  of  learning  them. 

III.  The  constancy  or  inconstancy  of  employment  in 
them.  If  a  trade  can  be  followed  only  part  of  the  year, 
wages  must  be  higher  than  a  trade  that  offers  regular  em- 
ployment throughout  the  year. 

IV.  The  small  or  great  trust  which  must  be  reposed  in 
those  who  exercise  them. 

V.  The  probability  or  improbability  of  success  in  them. 
If  success  is  sure  the  reward  is  small;  if  uncertain,  those 
who  succeed  receive  large  returns. 

The  causes  which  Adam  Smith  mentions  operate  only 
because  they  affect  the  supply  of  labor.  They  must  be 
considered  together  and  not  separately.  For  example,  a 
garbage  collector  does  not  follow  an  agreeable  occupation, 
yet  his  wages  are  low.  Adam  Smith's  first  cause  would 
seem  to  imply  that  the  wages  of  a  garbage  collector  should 
be  high,  but  the  four  other  causes  show  why  his  wages 
are  low. 

Summary. — Land,  labor,  and  capital  co-operate  in  the 
production  of  wealth  and  each  is  entitled  to  a  share  of  the 
product.  Labor  cannot  receive  the  entire  product  be- 
cause, in  this  event,  capital  and  land  would  not  be  fur- 
nished by  their  owners.  The  share  which  each  receives 
depends  upon  how  much  each  is  needed.  If  labor  is  in 
much  demand  wages  will  be  high.  If  there  is  much  labor 
as  compared  to  capital  and  land,  wages  will  be  low.     Wages 


278  THE   ELEMENTS   OF   ECONOMICS 

are  paid  out  of  the  products  of  industry.  A  high  standard 
of  Uving  means  high  wages,  but  not  necessarily  high  cost 
of  production,  because  well-paid  laborers  produce  more 
than  poorly  paid  laborers.  Real  wages  consist  of  the 
goods  which  may  be  purchased  with  money  wages. 

At  any  one  time  wages  are  paid  for  the  time  employed 
in  work.  Piece  wages  are  paid  at  so  much  per  piece. 
R  a te-of -service  wages  are  a  combination  of  time  wages 
and  piece  wages.  Skilled  labor  does  not  compete  with 
unskilled  labor  nor  does  brain  work  compete  with  manual 
labor.  Wage-earners  may  be  divided  into  five  non- com- 
petitive groups.  The  way  to  get  high  wages  is  to  prepare 
for  entrance  into  a  group  where  competition  is  not  intense. 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1.  Would  you  rather  be  a  dentist,  a  physician,  or  a  pharmacist? 

What  preparation  is  needed  for  each  profession?  How  do 
the  hours  of  labor  compare?  How  do  wages  compare? 
Which  is  held  in  the  highest  social  esteem? 

2.  Why  do  men  generally  receive  a  higher  wage  than  women  in 

the  same  employments?  Why  do  labor  unions  composed  of 
men  demand  equal  pay  for  women? 

3.  Read  Adam  Smith's  reasons  for  differences  in  wages  in  different 

employments  as  set  forth  in  his  Wealth  of  Nations.  What  do 
you  think  of  his  reasons  for  so  many  young  men  being 
attracted  to  the  legal  profession? 

4.  What  laborers  in  your  city  are  paid  time  wages  ?     Piece  wages  ? 

How  does  their  wage  affect  their  efforts? 

5.  How  do  wages  in  your  city  compare  with  wages  five  years  ago  ? 

What  has  caused  any  difference?  Have  real  wages  or 
nominal  wages  changed? 


CHAPTER  XXVI 
LABOR  PROBLEMS 

The  Open  versus  the  Closed  Shop. — In  an  open  shop 
there  is  theoretically  no  discrimination  in  the  employment 
of  labor.  A  laborer  may  secure  employment  without 
regard  to  his  membership  or  non-membership  in  a  union. 
Many  ^'open  shops"  are  open  in  theory  only,  as  the  em- 
ployers discriminate  against  union  labor. 

A  closed  shop  is  one  which  employs  only  union  labor. 
All  labor  unions  desire  the  closed  shop  and  maintain  that 
without  a  closed  shop  the  union  cannot  accomplish  its 
purposes.  If  the  labor  organizations  can  control  the  sup- 
ply of  labor  and  make  it  necessary  for  employers  to  engage 
union  men  or  none  at  all,  they  can  exercise  a  monopoly 
power  and  can  force  employers  to  grant  any  reasonable 
demands. 

The  arguments  in  favor  of  an  open  shop  are  as  follows: 

1.  Labor  organizations  are  a  monopoly,  or  wish  to 
become  a  monopoly.  By  limiting  the  number  of  laborers 
in  certain  industries,  they  force  workmen  into  other  em- 
ployments and  overcrowd  some  industries. 

2.  Unions  interfere  with  the  right  of  non-union  men  to 
secure  employment.  Most  workmen  in  the  United  States 
are  not  members  of  unions  and  do  not  wish  to  join.  The 
labor  organizations  try  to  prevent  them  from  getting  em- 
ployment or  try  to  coerce  them  into  joining  the  union. 
The  closed  shop  is  a  means  of  oppression. 

279 


28o  THE   ELEMENTS   OF  ECONOMICS 

3.  In  a  closed  shop  the  unions  often  Hmit  the  amount 
of  work  that  a  man  can  do  in  a  day.  They  slow  up  pro- 
duction to  the  injury  of  all  members  of  society,  themselves 
included. 

4.  When  labor  unions  control  a  shop  they  stir  up  strife 
and  ill-feeling  with  employers.  They  interfere  with  the 
employer's  right  to  run  his  own  affairs  in  his  own  way. 

The  advocates  of  the  closed  shop  reply  with  arguments 
like  the  following: 

1.  Labor  unions  have  secured  higher  wages,  better 
conditions,  and  shorter  hours.  This  service  has  benefited 
all  laborers.  Employers  who  say  they  want  the  open  shop 
really  want  to  exclude  union  labor. 

2.  The  closed  shop  is  essential  to  collective  bargaining. 
Employers  are  bound  together  in  associations  of  employers. 
Labor  must  be  united.  An  individual  has  no  chance  at 
bargaining.  He  goes  to  a  shop  and  is  told  that  wages  are 
five  dollars  a  day.  He  must  take  it  or  leave  it.  He  cannot 
bargain.  Unless  the  union  can  speak  for  all  employees,  it 
loses  in  bargaining  power. 

3.  Limiting  of  output  is  sometimes  desirable.  Pro- 
duction may  be  set  at  too  high  a  rate  in  piece-work,  or 
hours  may  be  too  long  in  time-work.  Unions  do  not  favor 
loafing  on  the  job.  There  is  as  much  ''soldiering"  in  non- 
union shops  as  in  union  shops. 

4.  Labor  organizations  are  not  the  causes  of  industrial 
strife.  Strikes  are  not  the  objects  of  unions,  but  are  some- 
times necessary  in  order  to  obtain  justice.  In  an  open 
shop  there  is  less  opportunity  to  obtain  fair  treatment 
than  in  a  closed  shop. 

5.  The  employer  who  says  it  is  none  of  the  public's 


LABOR   PROBLEMS  281 

business  how  his  affairs  are  conducted  is  behind  the  times. 
The  public  says  that  he  must  not  employ  child  labor, 
must  keep  his  factory  in  a  sanitary  condition,  and  in  other 
ways  regulate  his  business.  Labor  has  a  right  to  say 
something  about  conditions  of  employment.  Unorgan- 
ized labor  is  inarticulate.  Therefore  organized  labor  must 
speak  and  it  cannot  speak  with  authority  except  in  a 
closed  shop. 

The  question  of  the  open  versus  the  closed  shop  cannot 
be  answered  except  in  a  general  way.  Whether  a  closed 
shop  is  helpful  or  injurious  depends  on  the  union.  Some 
unions  have  been  agents  of  oppression,  but  this  is  generally 
the  fault  of  dishonest  leaders.  If  an  employer  tries  to  make 
his  shop  an  open  shop  in  order  to  force  wages  below  the 
rate  that  will  afford  a  fair  standard  of  living  and  the 
unions  oppose  this,  they  are  acting  for  the  public  interest. 
If  the  members  of  a  union  refuse  to  work  for  a  man  who 
employs  ^'scab"  labor  and  at  the  same  time  are  willing  to 
admit  non-union  men  into  their  ranks  without  imposing 
prohibitive  initiation  fees,  there  is  something  to  be  said  for 
them.  The  non-union  man  may  injure  the  cause  of  labor 
by  working  for  less  than  a  fair  wage.  If,  however,  the 
union  acts  as  a  closed  corporation  by  excluding  new  mem- 
bers or  imposes  prohibitive  initiation  fees,  or  unreasonably 
limits  the  number  of  apprentices  or  in  other  ways  fol- 
lows an  oppressive  policy,  an  open  shop  is  best  for  all 
concerned. 

Strikes. — ^A  strike  is  a  concerted  quitting  of  work.  That 
men  have  the  right  to  stop  work  either  as  individuals  or 
as  members  of  a  union  is  beyond  question.  However,  a 
strike  is  industrial  warfare  and  should  be  undertaken  only 


282  THE  ELEMENTS   OF  ECONOMICS 

when  all  other  efforts  at  redress  of  grievances  have  failed. 
Strikes  injure  laborers,  for  even  if  a  strike  succeeds  it  may 
be  years  before  the  advantages  gained  by  the  strike  balance 
the  losses  incurred  while  the  strike  was  being  conducted. 
Just  as  the  laborers  lose  wages  during  the  strike,  the  em- 
ployers lose  business  and  profits.  The  pubHc  is  often  the 
chief  loser,  because  it  is  put  to  inconvenience  during  a 
strike  and  has  to  pay  increased  prices  if  the  supply  of  a 
commodity  becomes  scarce. 

Resort  to  violence  during  strikes  is  always  to  be  con- 
demned. However  just  the  cause  of  a  strike,  its  instiga- 
tors forfeit  all  claim  to  public  support  and  sympathy  when 
they  resort  to  violence.  Peaceful  picketing,  or  stationing 
strikers  near  a  shop  in  order  to  dissuade  men  from  work- 
ing, is  generally  regarded  as  legal,  though  the  courts  have 
not  always  so  decided. 

Sympathetic  Strikes. — A  sympathetic  strike  is  one  that 
is  undertaken  against  an  employer  whose  men  have  no 
grievance  in  order  to  force  another  employer  to  grant  the 
demands  of  strikers.  For  example,  there  may  be  two 
street-railroad  companies  in  a  city.  The  employees  of  one 
line  strike  and  after  a  time  the  employees  of  the  other  line 
strike  in  order  that  public  pressure  may  be  exerted  to  com- 
pel the  first  company  to  grant  the  demands  of  the  men 
and  end  the  inconvenience  which  the  public  has  suffered. 
There  is  no  apology  for  a  sympathetic  strike  which  injures 
an  employer  who  has  treated  his  men  fairly. 

General  Strikes. — General  strikes  are  strikes  of  all  the 
workmen  of  a  district  or  a  country.  They  usually  are  the 
result  of  some  real  or  fancied  grievance  against  a  govern- 
ment.    There   has   never   been   a   general   strike   in   the 


LABOR   PROBLEMS  '  285 

United  States  and  there  is  no  reason  to  anticipate  that 
there  ever  will  be. 

Lockouts. — A  lockout  is  a  strike  instituted  by  employers. 
Lockouts  are  usually  resorted  to  when  a  strike  is  pending 
and  the  employers  desire  to  precipitate  action  before  the 
employees  have  completed  their  plans. 

Arbitration. — The  wisdom  of  settling  disputes  by  arbi- 
tration admits  of  no  doubt.  Agreements  between  em- 
ployers and  employees  sometimes  provide  that  all  disputes 
shall  be  settled  by  arbitration.  Most  American  states  have 
state  boards  of  arbitration  whose  duty  it  is  to  endeavor 
to  prevent  strikes  and  if  strikes  occur  to  offer  their  services 
as  arbitrators.  The  party  to  a  dispute  which  claims  that 
it  has  nothing  to  arbitrate  usually  has  a  weak  case.  Boards 
of  arbitration  generally  consist  of  three  persons,  one  chosen 
by  each  side  and  a  third  chosen  by  these  two.  Usually 
both  sides  agree  to  accept  the  decision  of  the  arbitrators. 
The  Canadian  Industrial  Disputes  Act  of  1907  forbids 
strikes  or  lockouts  in  industries  engaged  in  furnishing 
transportation  by  railroads  or  street  railroads  or  in  in- 
dustries furnishing  heat,  light,  or  power,  unless  the  ques- 
tions at  issue  have  first  been  submitted  to  arbitration. 
After  the  board  of  arbitration  has  rendered  its  decision 
and  the  findings  have  been  published,  strikes  or  lockouts 
are  legal.  This  has  practically  abolished  strikes  in  Canada 
so  far  as  they  affect  the  industries  named  in  the  act. 

In  several  of  the  provinces  of  Australia  compulsory  arbi- 
tration is  established  by  law  and  the  experiment  seems  to 
give  general  satisfaction.  Compulsory  arbitration  is  not 
favored  generally  in  the  United  States  by  either  employers 
or  employees  and  is  of  doubtful  constitutionality. 


284  THE   ELEMENTS   OF   ECONOMICS 

The  State  of  Kansas,  as  a  result  of  a  strike  in  the  coal 
mines  of  that  state  in  the  winter  of  191 9-1 9 20,  established 
a  Court  of  Industrial  Relations.  This  court  has  jurisdic- 
tion over  disputes  arising  in  industries  of  Kansas  supplying 
the  people  with  food,  fuel,  and  transportation.  Laborers 
in  Kansas  in  the  specified  industries  may  secure  direct  and 
immediate  redress  of  grievances  without  resorting  to  a 
strike.  The  Court  of  Industrial  Relations  is  composed  of 
three  judges  appointed  by  the  governor  with  the  advice 
and  consent  of  the  Senate.  The  court  has  the  power  to 
require  the  continuous  operation  of  the  specified  indus- 
tries, which  are  forbidden  to  shut  down  ''for  any  purpose 
to  affect  wage  controversies  or  the  price  of  the  commodity 
to  the  public."  Though  opposed  by  some  labor  leaders, 
the  law  has  general  support  in  Kansas  and  has  practically 
abolished  strikes  and  lockouts. 

Boycotts. — ^A  boycott  is  a  refusal  of  a  group  of  persons 
to  purchase  goods  produced  or  sold  by  another  person  or 
group  of  persons.  The  boycott  has  long  been  in  use. 
''The  abolitionists  boycotted  slave-made  products;  the 
temperance  people  have  used  the  same  method  to  repress 
the  liquor  nuisance;  the  pulpit  tried  hard  to  boycott  Sun- 
day newspapers;  and  recently  there  has  been  established 
in  the  city  of  New  York  a  society,  consisting  of  women 
occupying  excellent  social  positions,  pledged  not  to  pur- 
chase goods  of  houses  which  do  not  furnish  proper  con- 
veniences for  their  saleswomen."  * 

A  simple  boycott  usually  starts  by  working  men  refusing 
to  purchase  goods  made  by  a  person  whom  they  consider 
unfair  to  union  labor.     The  boycott  may  be  further  ex- 

*  Wright,  Industrial  Evolution  of  the  United  States,  p.  319. 


LABOR   PROBLEMS  285 

tended  by  endeavoring  to  persuade  others  to  join  the  boy- 
cott. A  secondary  boycott  is  one  declared  against  a  person 
who  patronizes  a  boycotted  firm.  For  example,  a  boycott 
may  be  declared  against  a  street-railroad  company.  But 
John  Doe,  who  is  a  grocer,  continues  to  ride  on  the  street- 
cars. Then  the  store  of  John  Doe  is  boycotted.  This  is 
a  secondary  boycott.  The  courts  have  generally  declared 
secondary  boycotts  to  be  illegal  and  such  boycotts  seem 
unjust. 

Another  form  of  boycott  is  to  publish  an  unfair  list,  with 
or  without  advice  not  to  patronize  any  firm  on  the  list. 
The  courts  have  generally  upheld  actions  to  prevent  the 
publications  of  such  lists.  However,  a  fair  list  may  be 
published.  The  Consumers'  League  publishes  a  "White 
List,"  giving  the  names  of  firms  which  conform  to  the 
standard  which  the  league  approves. 

Child  Labor  Laws. — Children  need  play,  open-air  life, 
and  schooling.  Selfish  parents  and  greedy  employers  will 
put  children  to  work  unless  prevented  by  law.  That  a 
child  may  prefer  to  work  rather  than  go  to  school  is  no 
excuse.  The  child  is  unable  to  make  a  wise  decision  in 
regard  to  his  future.  There  is  a  probability  that  the  child 
will  enter  some  employment  that  leads  nowhere.  His 
earnings  may  seem  large  to  him  at  first,  but  in  a  few  years 
he  will  be  distanced  by  the  child  who  remains  at  school. 

Laws  are  necessary  in  order  to  prevent  child  labor.  In 
1 916  Congress  passed  an  act  debarring  from  interstate 
commerce  all  articles  made  by  child  labor.  This  act  was 
declared  unconstitutional  and  in  1919  a  new  child-labor 
law  was  enacted  by  Congress.  The  new  law  prohibits  the 
employment  of  children  under  sixteen  years  of  age  in  mines 


286  THE   ELEMENTS   OF  ECONOMICS 

and  quarries,  and  of  children  under  fourteen  years  of  age 
in  mills,  canneries,  workshops,  and  factories.  Children 
under  sixteen  years  of  age  may  not  be  employed  in  mills, 
canneries,  or  factories  more  than  eight  hours  a  day,  more 
than  six  days  in  a  week,  or  at  night. 

The  Federal  law  applies  to  only  about  15  per  cent  of 
the  child  laborers  of  America.  It  Is  a  good  law  so  far  as 
it  goes;  and  it  probably  goes*  as  far  as  the  Constitution 
permits. 

Most  legislation  to  prevent  child  labor  must  be  left  to 
the  states.  In  twenty-six  of  the  states  children  may  not 
work  unless  physically  qualified.  Most  of  the  states  have 
educational  requirements,  but  only  six  of  the  states  re- 
quire completion  of  the  eighth  grade,  "which  seems  little 
enough  to  require  of  children  who  go  to  work  under  six- 
teen." 

State  laws  usually  prohibit  the  employment  in  factories 
of  children  under  fourteen  years  of  age,  provide  for  con- 
tinuation schools,  prohibit  night  work  and  limit  the  hours 
of  labor  to  eight  or  less. 

Women  Wage-Earners. — Women  were  extensively  em- 
ployed in  industry  before  the  World  War,  but  the  war 
vastly  increased  the  number  of  women  employees.  There 
is  no  doubt  that  women  will  continue  in  industry.  By 
entering  gainful  employments  women  are  able  to  take  care 
of  themselves  and  need  not  marry  unless  they  meet  a  man 
whom  they  consider  worthy.  The  factory  laws  which 
have  been  passed  to  protect  men  against  accidents  and 

*  Judge  Boyd,  in  the  Western  Judicial  District  of  North  Carolina,  de- 
clared the  law  unconstitutional  on  May  2,  1919.  The  act  is  in  force  else- 
where in  the  United  States. 


LABOR   PROBLEMS  287 

unwholesome  surroundings  are  not  sufficient  to  protect 
women.  Laws  for  the  protection  of  women  should  pro- 
hibit night  work,  require  comfortable  seats  with  backs, 
make  provision  for  separate  and  proper  toilet  facilities, 
and  prohibit  a  working  week  of  more  than  forty-four 
hours. 

The  Eight-Hour  Day. — The  working  day  should  not  be 
so  long  as  to  exhaust  the  working  man  nor  to  impair  his 
health  or  strength.  No  one  questions  that  the  laborer 
should  have  a  reasonable  amount  of  time  for  his  own 
use.  He  needs  time  for  recreation,  self-improvement,  and 
social  pleasures.  In  some  employments,,  like  agriculture, 
ten  hours  may  not  be  too  long  for  a  working  day.  In 
others,  like  driving  a  fast  locomotive,  six  hours  may  be 
enough.  For  factory  work  eight  hours  a  day  with  a  half 
holiday  on  Saturday  is  favored  by  most  laborers.  There 
is  much  to  be  said  for  the  eight-hour  day,  but  it  should  be 
an  honest  eight-hour  day,  not  eight  hours  at  regular  pay 
and  two  additional  hours  at  double  pay.  The  advocates 
of  an  eight-hour  day  advance  arguments  like  the  following: 

1.  Long  hours  mean  over-fatigue.  Accidents  and  dis- 
ease follow  fatigue. 

2.  Long  hours  bring  moral  degradation.  After  ex- 
cessive labor  the  tired  worker  responds  more  readily  to 
coarse  pleasures  and  excitements. 

3.  A  shorter  day  increases  efficiency  of  labor  and  im- 
proves the  output. 

4.  Shorter  hours  lead  to  continuity  of  employment. 
When  no  restrictions  are  placed  upon  hours  of  labor  in  a 
seasonal  industry  the  tendency  is  to  concentrate  the  work 
in  a  brief  season  with  long  hours  of  overtime. 


288  THE   ELEMENTS   OF   ECONOMICS 

5.  Shorter  hours  lead  to  better  citizenship  by  giving 
time  for  education  and  self-improvement. 

Summary. — One  of  the  most  important  questions  of  our 
time  is  the  open  versus  the  closed  shop.  Chambers  of 
Commerce  and  associations  of  employers  are  conducting 
campaigns  in  favor  of  the  open  shop,  while  the  American 
Federation  of  Labor  and  labor  organizations  generally 
desire  the  closed  shop.  The  question  has  been  given  much 
attention  by  the  public  press  and  by  prominent  men  not 
identified  with  either  labor  or  capital.  It  cannot  be  an- 
swered except  in  a  general  way.  Some  labor  unions  have 
used  the  closed  shop  to  oppress  their  employers  and  some 
employers  have  used  the  open  shop  to  lower  wages  below 
a  decent  standard.  With  a  spirit  of  fair  play  on  both 
sides,  either  an  open  or  a  closed  shop  may  be  operated  to 
the  benefit  of  all  concerned. 

Strikes  are  a  loss  to  all,  the  public  included.  Even  if 
the  strike  is  won,  the  losses  in  wages  while  the  strike  was 
on  may  more  than  counteract  the  gain.'  There  are  times 
when  strikes  may  be  necessary  but  they  should  be 
avoided  if  possible.  During  one  recent  year  (19 18)  there 
were  3,181  strikes  and  104  lockouts  in  the  United  States. 
Resort  to  violence  during  strikes  is  always  to  be  con- 
demned. Any  one  who  uses  violence  in  a  strike  is  a  law- 
breaker and  forfeits  all  claim  to  sympathy. 

Industrial  disputes  cannot  always  be  avoided.  They 
should  be  settled  by  arbitration.  No  one  who  has  right 
on  his  side  need  fear  the  decision  of  an  impartial  board  of 
arbitrators. 

The  boycott  is  another  weapon  of  labor,  but  it  is  a 
weapon  which  should  be  used  with  care,  if  at  all.     A  boy- 


LABOR   PROBLEMS  289 

cott  often  inflicts  injury  upon  innocent  people.  Even 
when  started  as  a  simple  boycott,  the  tendency  to  resort 
to  a  secondary  boycott  is  strong.  Secondary  boycotts  are 
always  morally  unjustified.  Among  the  most  important 
of  labor  questions  is  the  regulation  of  child  labor.  Chil- 
dren on  the  farm  and  in  the  home  may  work  a  reasonable 
time  each  day  with  profit  to  themselves.  But  a  factory  is 
no  place  for  a  child  under  fourteen  years  of  age;  some 
would  even  say  under  sixteen  years  of  age.  Since  some 
parents  are  selfish  and  some  employers  greedy  and  no 
child  under  fourteen  competent  to  look  after  his  own 
welfare,  the  government  must  regulate  conditions  and 
hours  of  child  laborers,  make  provision  for  their  educa- 
tion, and  should  prohibit  work  at  night  of  all  under  six- 
teen and  absolutely  prohibit  labor  in  factories  and  mines 
of  all  children  under  fourteen  years  of  age. 

The  eight-hour  day  is  desired  by  most  laborers.  The 
advantages  of  a  short  labor  day  have  been  given  in  the 
text.  However,  it  must  be  remembered  that  some  em- 
ployments are  more  exhausting  than  others.  Ten  hours' 
farm  work  is  certainly  less  exhausting  than  eight  hours  in 
a  factory,  and  eight  hours  in  a  factory  are  less  exhausting 
than  six  hours  spent  as  engineer  on  a  fast  express  train. 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECUL  REPORTS 

1 .  Get  the  opinion  of  some  employers  of  labor  in  your  city  on  the 

open  versus  the  closed  shop.     Also  see  what  the  laborers 
think  about  this  question. 

2.  If  the  law  of  a  state  limited  work  in  the  mines  to  eight  hours  a 

day  and  the  employers  of  the  mines  were  requiring  the  men 
to  work  ten  hours,  would  the  men  be  justified  in  striking? 


290  THE   ELEMENTS   OF   ECONOMICS 

Give  some  instances  of  strikes  that  might  be  approved  by 
fair-minded  people. 

3.  Give  a  history  of  the  great  strike  in  the  anthracite  coal  mines 

of  Pennsylvania  in  1902  and  show  how  President  Roosevelt 
brought  the  strike  to  an  end. 

4.  '*In  the  period  1881-1905  there  occurred  36,757  strikes  and 

1,546  lockouts,  involving  200,000  establishments  and  over 
9,000,000  employees.  The  total  direct  and  indirect  losses 
resulting  therefrom  can  only  be  guessed  at,  but  they  prob- 
aoly  exceeded  the  direct  cost  of  any  war  in  which  the  United 
States  had  then  been  engaged." — Haworth,  The  United 
States  in  Our  Own  Times. 

What  would  you  consider  the  indirect  losses  occasioned 
by  a  strike? 

5.  Why  do  women  in  industry  need  more  protection  by  the  laws 

than  men? 


CHAPTER  XXVII 
LABOR  ORGANIZATIONS 

There  are  many  varieties  of  labor  organizations.  Among 
the  more  important  are  trade  unions,  industrial  unions, 
and  labor  unions.  A  trade  union  is  a  labor  organization 
composed  of  workers  in  one  trade  or  in  a  number  of  allied 
trades.  The  International  Typographical  Union  is  an 
example  of  a  trade  union,  as  it  confines  its  membership  to 
those  engaged  in  a  particular  trade.  An  industrial  union 
admits  to  membership  all  laborers  in  one  industry,  even 
though  they  may  be  employed  in  different  occupations. 
The  United  Mine  Workers  admits  to  membership  all  who 
are  employed  in  the  mining  industry,  whether  within  or 
outside  the  mines.  A  labor  union  seeks  membership  among 
all  workers  without  reference  to  particular  trades.  The 
Industrial  Workers  of  the  World  is  a  labor  union.   • 

The  American  Federation  of  Labor  is  composed  of  many 
labor  organizations,  some  of  them  trade  unions  and  some 
industrial  unions.  The  Federation  gives  almost  complete 
local  autonomy  to  its  member  organizations,  but  assists 
them  when  in  trouble.  Its  attention  is  chiefly  directed  to 
securing  legislation  favorable  to  labor,  promoting  the  use 
of  union  labels,  and  organizing  labor  in  districts  where  it 
has  not  been  organized. 

The  Services  of  Labor  Organizations. — ^Labor  organiza- 
tions render  educational,  social,  and  economic  services  to 
their  members.     Every  labor  organization  is  a  debating 

291 


292  THE   ELEMENTS   OF   ECONOMICS 

society,  and  its  members  receive  training  in  economic 
problems  and  in  public  speaking.  Not  infrequently  promi- 
nent men  address  the  meetings  upon  topics  of  general 
interest. 

Labor  organizations  are  social  and  fraternal  bodies. 
Dances,  entertainments,  and  other  social  gatherings  are 
held  under  the  auspices  of  unions  and  are  well  conducted. 
The  annual  dance  of  the  Longshoremen's  Union  might  not 
appeal  to  the  taste  of  people  in  high  society,  but  it  is  the 
best-conducted  dance  which  the  members  of  the  union 
attend.  The  fraternal  features  consist  of  caring  for  a 
member  in  distress  and  paying  funeral  expenses  when 
necessary.  The  fraternal  features  are  more  prominent  in 
the  older  organizations.  The  International  Typographical 
Union  has  a  sanitarium  for  the  care  of  its  members  who 
are  afflicted  with  tuberculosis. 

However,  the  chief  object  of  labor  unions  is  economic. 
An  individual  laborer  is  at  a  great  disadvantage  when 
disposing  of  his  services.  To  an  employer  it  makes  no 
difference  whether  or  not  he  employs  a  particular  laborer, 
but  it  makes  a  great  difference  to  the  laborer.  Labor  re- 
sembles a  perishable  commodity  and  the  laborer  must  dis- 
pose of  his  services  promptly  or  lose  his  day's  pay.  The 
laborer  is  not  always  able  to  take  his  services  to  a  better 
market  either  for  lack  of  funds  or  because  of  home  ties. 
The  conditions  under  which  he  works  may  not  be  suitable 
but  the  individual  laborer  is  often  unable  to  offer  an  effec- 
tive protest.  Labor  organizations  make  the  bargain  more 
equal.  Employers  may  not  need  a  certain  laborer  but 
they  need  labor.  Organized  labor  can  make  its  demands 
as  a  unit  and  can  be  supported  by  union  funds  if  employers 


LABOR   ORGANIZATIONS  •    293 

fail  to  offer  terms  which  are  considered  reasonable.  Col- 
lective bargaining  is  one  of  the  chief  advantages  of  labor 
unions.  The  political  power  of  labor  organizations  may 
be  exerted  toward  betterment  of  working  conditions.  As 
an  individual  the  laborer  has  little  political  power,  but  as 
the  member  of  an  organization  his  political  power  may  be 
greater  than  that  of  his  employer. 

The  Rise  of  Labor  Organizations  in  the  United  States. — 
Although  there  were  many  labor  organizations  in  the 
United  States  before  then,  labor  organizations  did  not 
become  important  until  about  the  middle  of  the  last 
century.  There  was  not  much  need  fo;r  them.  When 
good  public  land  could  be  secured  easily,  dissatisfied  wage- 
earners  could  take  to  farming  and  become  landlords  and 
capitalists. 

The  International  Typographical  Union  was  organized 
in  1850,  though  the  word  ''International"  was  not  used 
until  1869.  Other  unions  followed,  and  by  1870  there  were 
about  forty  labor  organizations  in  the  United  States. 

The  Noble  Order  of  the  Knights  of  Labor  was  organized 
in  Philadelphia  in  1869.  The  Knights  of  Labor  planned 
to  include  all  labor  in  their  organization.  The  order  was 
at  first  secret,  but  this  feature,  being  opposed  by  members 
of  the  Roman  Catholic  Church  and  others,  was  abolished 
in  1870.  The  Knights  of  Labor  advocated  abolition  of 
speculation  in  land,  compensation  for  injuries  received  by 
laboring  men  while  employed,  a  progressive  tax  on  incomes 
and  inheritances,  an  eight-hour  day,  government  owner- 
ship of  railroads  and  telegraph  lines,  and  postal  savings- 
banks.  It  also  expected  the  abolition  of  the  wages  system 
through  the  introduction  of  co-operative  factories  managed 


294  THE   ELEMENTS   OF   ECONOMICS 

and  owned  by  working  men.  The  organization  num- 
bered about  100,000  workmen  in  1885.  In  this  year 
the  Knights  conducted  a  successful  strike  against  the 
Gould  railroad  system,  which  resulted  in  an  increase  of 
membership  to  600,000  in  1886.  The  strike  of  1885  was 
memoral&le  because  of  the  introduction  of  sabotage,  though 
the  name  was  of  later  origin.  The  particular  kind  of 
sabotage  employed  was  the  disabling  of  locomotives  by 
removing  vital  parts.  The  strike  of  1885  was  won  by 
violence,  and,  though  it  immediately  resulted  in  increased 
membership,  it  ultimately  wrecked  the  order.  Radicals 
got  in  control  and  ordered  unnecessary  and  unwise  strikes. 
As  a  result  the  Knights  lost  support. 

In  October,  1886,  the  Knights  of  Labor  declared  war  on 
the  American  Federation  of  Labor.  From  this  time  its 
decline  set  in  and  the  order  disappeared  in  the  late  nine- 
ties. 

The  American  Federation  of  Labor. — ^The  American 
Federation  of  Labor  was  organized  in  Pittsburgh  in  1881, 
though  the  name  was  not  adopted  until  1886,  at  a  conven- 
tion held  in  Columbus,  Ohio.  The  unit  of  representation 
in  the  American  Federation  of  Labor  is  the  national  union, 
local  unions  not  being  represented  unless  they  have  no 
national  organization.  Samuel  Gompers  was  elected  presi- 
dent in  1886,  an  office  which  he  has  held — with  the  excep- 
tion of  one  year — to  the  present  time.  The  federation  has 
avoided  meddling  in  politics  and  has  steered  clear  of  radical 
and  revolutionary  theories.  This  policy  has  been  success- 
ful and  its  membership  in  1921  was  over  4,000,000.  The 
American  Federation  of  Labor  from  its  beginning  has 
favored  an  eight-hour  day  and  has  insisted  upon  the  prin- 


LABOR   ORGANIZATIONS  295 

ciple  of  collective  bargaining.  At  the  annual  convention 
held  in  Atlantic  City  in  191 9  a  program  was  adopted 
including  the  following  demands:* 

National  legislation  to  prevent  child  labor; 

State  and  national  regulation  of  corporations; 

Government  ownership  of  docks  and  wharfs; 

No  employment  agencies  to  be  operated  for  profit; 

PubHc-service  utilities  to  be  owned  by  the  government 
or  to  be  regulated  by  the  government  in  the  public  interest; 

Public  aid  in  home-building  and  housing; 

Restriction  of  immigration; 

Right  of  public  employees  to  collective  bargaining; 

Equal  pay  for  equal  work  by  men  and  women; 

Opposition  to  militarism; 

jPublic  ownership  of  waterways  and  water-power. 

The  Industrial  Workers  of  the  Worid.— The  Industrial 
Workers  of  the  World  was  organized  in  Chicago  in  1905. 
This  was  a  merger  of  several  radical  labor  groups  which 
opposed  the  American  Federation  of  Labor  because  the 
Federation  was  regarded  as  too  conservative  and  because 
it  had  neglected  the  unskilled  laborers.  The  I.  W.  W. 
seeks  to  organize  all  the  workers  of  each  industry  into 
*'one  big  union"  and  to  unite  these  unions  in  one  great 
national  organization.  The  I.  W.  W.  is  opposed  to  the 
wages  system  and  cares  nothing  for  bargaining  with  capi- 
talists; it  declares  that  the  aim  of  labor  should  be  to  pos- 
sess the  industrial  plants  of  the  country  and  operate  them 
for  the  benefit  of  the  workers.  The  I.  W.  W.  therefore 
advocates  what  is  called  syndicalism  in  Europe  and  this 

*  For  a  summary  of  this  |"program,  see  Mary  Beard's  American  Labor 
Movement,  pp.  163,  164. 


296  THE   ELEMENTS   OF  ECONOMICS 

is  a  form  of  socialism.  During  the  Great  War  the  I.  W.  W. 
was  disloyal  in  word  and  deed,  and  as  a  result  their  leader, 
W.  D.  Haywood,  was  convicted  ot  violating  the  espionage 
act.  The  order  lt)st  in  membership  and  reputation  and  is 
now  relatively  unimportant. 

The  Loyal  Legion  of  Loggers  and  Lumbermen. — The 
lumber  industry  of  the  Northwest  was  once  a  stronghold 
of  the  I.  W.  W.  Conditions  of  labor  were  far  from  what 
they  should  have  been  and  the  lumber  camps  offered  a 
fertile  field  for  radical  organizers.  Nowhere  were  the 
■excesses  of  the  I.  W.  W.  more  in  evidence  than  here. 
Now  all  is  changed  through  the  efforts  of  the  Loyal  Legion 
of  Loggers  and  Lumbermen.  This  organization,  familiarly 
known  as  the  4LL  is  a  new  type  of  labor  organization. 
The  unit  of  membership  is  a  local  and  all  persons  working 
for  the  same  employer  may  be  members  of  the  local  as 
•can  the  employer  himself. 

The  employer,  superintendent,  foreman,  skilled  laborer, 
common  laborer,  and  clerk,  are  all  welconie  to  membership 
and  are  equal  in  the  organization.  The  initiation  fee  is 
one  dollar  and  the  dues  are  twenty-five  cents  a  month. 
Employers  contribute  a  sum  equal  to  that  of  all  the  mem- 
bership dues  of  their  employees  who  are  members  of  the 
Legion.  An  employer  also  files  a  bond  as  a  guarantee  that 
he  will  abide  by  the  rules  of  the  order.  All  questions  of 
wages,  hours  of  labor,  and  conditions  of  labor  are  settled 
by  elected  representatives  of  all  members  of  the  industry. 
There  is  an  "employees'  conference  committee,"  consisting 
of  a  chairman,  vice-chairman,  and  secretary  of  the  local. 
It  is  the  duty  of  this  committee  to  confer  with  the  operator 
or  the  operator's  agent  on  all  differences  of  local  concern 


LABOR  ORGANIZATIONS  297 

and  to  endeavor  to  settle  these  differences  in  a  manner 
satisfactory  to  all  parties.  There  is  a  distinction  between 
''matter  of  local  concern"  and  "questions  of  general  im- 
port." The  former  are  all  "questions  affecting  the  living, 
working,  and  recreation  conditions  of  each  local,"  un- 
warranted discharge  of  laborers,  and  the  like.  "Questions 
of  general  import"  are  those  affecting  the  industry  by 
districts  or  as  a  whole,  such  as  wages  and  hours  of  labor. 
Superior  to  the  conference  committee  of  the  local  is  the 
district  board.  There  is  a  district  board  in  each  of  the 
twelve  districts  into  which  the  lumber  region  of  the  Pacific 
Northwest  is  divided. 

The  district  board  consists  of  four  employees,  two  mill- 
men  and  two  loggers,  chosen  by  the  employees  of  the  dis- 
trict. The  decision  of  the  district  board  is  final  on  matters- 
of  local  concern.  If  the  district  board  cannot  reach  a 
decision  the  case  is  referred  to  the  board  of  directors. 

The  board  of  directors  is  the  highest  court  of  appeal  of 
the  Legion.  It  is  composed  of  the  employees'  district 
board  chairmen  of  each  district  and  the  operators'  district 
board  chairmen.  This  board  settles  all  appeals  and 
"matters  of  general  import."  In  an  article  published  in 
the  Atlantic  Monthly  (February,  192 1),  Professor  R.  P. 
Boas  says: 

"The  Legion  has  accomplished  six  distinct  things.  It 
has  made  calm  and  steady  production  possible  in  an  in- 
dustry which  three  years  ago  was  thoroughly  disorgan- 
ized. It  has  placed  wages  on  the  highest  scale  in  the 
United  States  for  the  work  done,  and  has  established  the 
eight-hour  day.  It  has  stabilized  wages  on  a  minimum 
uniform  scale,  with  an  allowance  for  reward  for  superior 


298  THE  ELEMENTS   OF   ECONOMICS 

skill  and  initiative.  It  has  made  striking  progress  in  im- 
proving sanitary  conditions  in  the  industry. 

"The  sanitary  officer  reports  substantial  improvements 
in  conditions.  A  general  clean-up  has  taken  place  in 
84  per  cent  of  the  operations.  Eighty-six  per  cent  of  the 
camps  have  bathing  facilities.  .  .  .  The  forty-eight  com- 
plaints of  bad  sanitary  conditions  made  in  191 9  were  all 
adjusted.  It  has  begun,  through  an  organization  of  the 
wives  of  the  4LL  men,  called  the  Ladies  Loyal  Legion,  the 
development  of  the  community  life  of  the  lumber  camps 
and  mill  towns.  At  last  reports,  nearly  thirty  locals  had 
been  organized.  Finally,  it  has  been  carrying  on  a  persis- 
tent campaign  of  education  among  employers  and  em- 
ployees in  the  spirit  of  harmony,  co-operation,  and  fair 
play." 

Summary. — ^Labor  organizations  have  become  an  im- 
portant factor  in  modern  industry.  Through  organization 
laborers  have  received  socialand  educational  advantages, 
but  the  economic  interests  have  been  more  important. 

The  American  Federation  of  Labor  is  the  largest  labor 
organization  in  the  world.  Its  members,  with  few  excep- 
tions, are  loyal  to  America  and  do  not  seek  to  overthrow 
our  institutions  or  to  regard  themselves  as  the  only  persons 
worthy  of  consideration. 

The  I.  W.  W.  was  formed  in  1905  by  a  merger  of  several 
radical  groups  of  working  men.  It  is  socialistic  in  its 
teachings  and  methods.  It  makes  war  on  the  present 
industrial  order  and  does  not  hesitate  at  sabotage  and  other 
illegal  acts.  On  account  of  its  record  of  disloyalty  during 
the  war,  it  has  declined  in  numbers  and  is  now  of  little 
influence. 


LABOR  ORGANIZATIONS  299 

The  Loyal  Legion  of  Loggers  and  Lumbermen,  recently 
organized  in  the  lumber  regions  of  the  Pacific  Northwest,  is 
a  new  type  of  labor  organization.  It  includes  employers 
as  well  as  employees  among  its  members  and  seeks  the 
common  welfare.  Through  its  influence  wages  have  been 
increased,  working  conditions  improved,  and  industrial 
peace  has  prevailed  where  warfare  was  the  rule  when  the 
same  regions  were  strongholds  of  the  I.  W.  W. 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1.  Which  of  the  demands  of  the  American  Federation  of  Labor  as 

given  in  this  chapter  do  you  approve?  Why?  Do  you 
disapprove  of  any?     Why? 

2.  What  labor  organizations  exist  in  your  city?    What  have  they 

done  to  better  the  lot  of  working  men? 

3.  What  arguments  can  be  made  against  labor  organizations? 

Are  these  arguments  valid? 

4.  Labor  organizations  among  women  have  not,  as  a  rule,  been  so 

successful  as  among  men.     Give  some  reasons  for  this  fact. 

5.  A  prominent  labor  leader  in  New  York  City  was  recently  sent 

to  the  state  prison  at  Sing  Sing.  His  chief  offense  was  in 
holding  the  menace  of  strikes  over  employers  and  compelling 
them  to  pay  him  in  order  to  escape  from  strikes.  How  can 
labor  organizations  avoid  such  leadership? 


CHAPTER  XXVIII 

INTEREST 

Why  Interest  is  Paid. — Interest  is  a  sum  of  money  paid 
for  the  use  of  money  or  capital.  Usually  interest  is  re- 
garded as  a  return  for  the  use  of  money.  Much  more 
frequently  money  is  not  desired,  but  the  goods  which  it 
will  purchase  are  desired.  For  example,  a  manufacturer 
borrows  $10,000  with  which  to  buy  machinery  and  pays 
interest  at  the  rate  of  6  per  cent  a  year.  With  the  aid  of 
the  machinery  he  can  produce  goods  which  will  pay  all 
expenses  and  yield  him  a  profit.  Interest  is  paid  for  the 
use  of  capital,  therefore  it  goes  to  the  owner  of  capital, 
whether  he  puts  it  to  work  or  lends  it  to  another. 

Sometimes  capital  is  borrowed  directly.  A  man  may 
hire  a  building,  machinery,  or  a  truck.  The  payment  for 
such  a  loan  is  popularly  called  rent,  but  it  is  really  interest. 
Rent  is  defined  by  economists  as  payment  for  the  use  of 
land;  the  payment  for  the  use  of  capital  is  interest.  When 
capital  is  borrowed  in  the  form  of  material  instruments  of 
production,  these  goods  must  be  returned  in  as  good  con- 
dition as  when  borrowed,  or  the  owner  is  entitled  to  pay- 
ment for  depreciation.  Interest  does  not  pay  for  depre- 
ciation. 

Interest  as  a  Reward  for  Waiting. — Capital  has  been 
defined  as  that  part  of  the  product  of  industry  which 
is  used  to  produce  more  goods.     Capital  is  the  result  of 

300 


INTEREST  3or 

saving.  The  owner  of  wealth  has  two  options;  he  may 
consume  it,  or  he  may  put  it  to  work.  If  he  puts  it  to 
work,  he  sacrifices  present  pleasure  for  a  future  reward. 
Most  people  prefer  present  goods  to  future  goods  and  so 
a  premium  has  to  be  paid  to  induce  them  to  forego  present 
enjoyment.  This  reward  for  waiting  is  interest.  No  one 
wishes  to  part  with  $i,ooo  to-day  merely  on  the  assurance 
that  he  will  receive  $i,ooo  a  year  from  to-day.  The  guar- 
antee or  even  the  belief  that  he  will  get  back  his  $i,ooo 
with  $60  interest  at  the  end  of  the  year  induces  him  to 
make  the  loan. 

Pure  and  Gross  Interest. — Pure  or  net  interest  is  the 
amount  paid  for  the  use  of  capital  when  there  is  no  risk 
of  loss.  The  interest  on  bonds  of  the  United  States  is 
pure  interest.  Every  one  knows  that  both  principal  and 
interest  on  these  bonds  will  be  paid.  Loans  made  to 
private  persons  have  an  element  of  risk.  The  individual 
may  fail  in  business  or  may  die.  Loans  to  corporations 
are  not  without  risk.  The  corporation  may  become  bank- 
rupt. No  one  will  loan  where  risk  is  taken  unless  he  re- 
ceives some  compensation  for  the  risk.  The  greater  the 
risk  the  greater  the  compensation  demanded. 

The  Rate  of  Interest. — The  rate  of  pure  interest  is  fixed 
by  demand  and  supply.  If  capital  is  in  demand,  rates  of 
interest  will  rise  and  this  will  encourage  savings.  For 
example,  when  the  rate  of  interest  is  4  per  cent,  capital  is 
not  in  much  demand.  Some  people  will  consider  4  per  cent 
an  inducement  for  savings — to  others  it  is  not  a  sufficient 
inducement.  Let  the  rate  of  interest  rise  to  6  per  cent 
or  7  per  cent  and  savings  increase.  It  is  apparent  that 
at  any  time  the  rate  of  interest  is  higher  than  necessary  to 


302  THE   ELEMENTS   OF   ECONOMICS 

induce  many  people  to  save.  It  is  just  enough  to  satisfy 
persons  who  would  spend  their  savings  if  the  interest  rate 
were  lower.  These  persons  are  known  as  the  marginal 
savers. 

Long  and  Short  Time  Loans. — Loans  for  a  year  or  more 
are  long-time  loans.  What  is  wanted  in  long-time  loans 
is  capital,  not  money.  Interest  on  long-time  loans  does 
not  vary  with  the  amount  of  money  in  circulation.  For 
example,  if  the  amount  of  money  in  circulation  is  such  that 
a  piece  of  machinery  can  be  bought  for  $10,000,  a  6-per- 
cent rate  of  interest  will  produce  $600  a  year.  If  the 
amount  of  money  in  circulation  is  doubled  and  other 
things  remain  the  same,  $20,000  will  be  required  to  buy 
the  machine  and  a  rate  of  6  per  cent  will  return  the  lender 
$1,200  per  year,  which  will  be  equivalent  to  $600  when 
the  purchasing  power  of  money  was  twice  as  great. 

With  short-time  loans,  or  more  particularly  demajid 
loans,  the  rate  of  interest  varies  with  the  amount  of  money 
in  circulation.  If  a  man  borrows  money  and  pledges 
stocks  as  security  and  must  pay  the  loan  or  lose  his  stock, 
he  wants  money  and  he  will  have  to  pay  for  it  according 
to  the  amount  of  money  available.  The  great  market  is  for 
demand  loans  or  "call  loans,"  as  they  are  usually  desig- 
nated. A  call  loan  is  payable  on  demand.  It  is  secured 
by  stocks  or  bonds  and  is  almost  always  made  by  a  bank 
or  broker.  The  rate  of  interest  on  call  loans  differ^  from 
day  to  day  and  has  no  relation  to  the  rate  of  interest  on 
long-time  loans.  Under  the  law  of  New  York  call  loans 
may  yield  any  rate  of  interest  without  becoming  usurious. 
^'Call  loans"  are  chiefly  confined  to  those  trading  on  the 
stock  exchanges. 


INTEREST  303 

Usury  Laws. — Exorbitant  or  illegal  interest  is  called 
usury.  All  the  states  except  Colorado,  Maine,  and  Massa- 
chusetts (except  on  loans  less  than  $1,000)  have  laws  fix- 
ing a -maximum  rate  above  which  interest  charges  cannot 
legally  be  collected.  The  penalty  for  usury  in  some  of  the 
states  is  merely  the  loss  of  the  excess  of  interest,  in  others 
it  is  the  loss  of  all  interest.  Only  in  Arkansas,  New  York, 
and  California,  is  the  penalty  a  heavy  one.  In  the  two 
former  states  the  penalty  is  loss  of  both  principal  and 
interest  and  in  California  the  penalty  is  $500  fine  or  im- 
prisonment, or  both.  Usury  laws  are  not  always  enforced 
and  are  often  evaded  by  charging  a  "bonus"  for  making 
a  loan  or  charging  an  excessive  sum  for  legal  services,  such 
as  the  drawing  up  of  papers.  The  usury  laws  are  for  the 
protection  of  borrowers  and  are  presumed  to  protect  them 
against  lenders  who  would  take  an  undue  advantage  of 
their  need  for  money.  The  usury  laws  do  afford  some 
protection  and  are  valuable  in  fixing  the  rates  of  interest 
to  be  allowed  on  funds  in  the  custody  of  the  courts. 

Interest  Not  the  Only  Inducement  to  Saving. — The 
desire  to  profit  by  savings  is  a  great  inducement  to  thrift. 
It  is  not  the  only  inducement.  There  would  be  savings  if 
there  were  no  such  thing  as  interest.  The  conviction  that 
future  income  will  be  less  than  present  leads  people  to 
provide  for  the  future.  A  thousand  dollars  that  now  might 
be  spent  on  luxuries  may  at  some  future  time  be  needed  for 
necessities.  Wise  people  would  save  even  if  they  had  to 
rent  a  safe-deposit  vault  or  pay  a  bank  for  keeping  their 
money. 

Summary. — Interest  is  paid  for  the  use  of  capital.  The 
owner  of  wealth  may  consume  it  or  may  put  it  to  work. 


304  THE   ELEMENTS   OF  ECONOMICS 

If  he  puts  it  to  work  there  is  a  sacrifice  of  present  pleasure 
for  future  reward.  From  one  point  of  view  interest  is  a 
reward  for  waiting.  Gross  interest  includes  payment  for 
risk.  There  is  no  risk  in  lending  money  to  the  United 
States,  but  in  lending  money  to  most  persons  or  corpora- 
tions there  is  an  element  of  risk.  The  owner  of  capital 
must  be  paid  for  the  risk  he  is  taking  or  he  will  not  part 
with  his  funds. 

The  rate  of  pure  interest  varies  with  demand  and  supply. 
If  there  is  a  great  demand  for  capital,  the  rate  of  interest 
will  rise.  A  rise  in  the  rate  of  interest  induces  more  people 
to  save  and  thus  increases  the  amount  of  capital. 

Generally,  capital  is  desired  by  borrowers  and  not 
money.  But  in  short-time  loans  money  is  often  wanted. 
Call  loans  are  payable  on  demand  and  the  rate  of  interest 
varies  with  the  demand  and  supply  of  money.  The  rate 
of  interest  on  long-time  loans  does  not  vary  with  changes 
in  the  amount  of  money  in  circulation. 

Although  interest  is  an  inducement  to  saving,  prudent 
people  would  save  even  if  there  were  no  such  thing  as 
interest.     Savings  provide  for  future  wants. 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

I.  Aristotle  said  that  interest  is  immoral  since  money  does  not 
beget  money.  In  Aristotle's  time  there  were  no  oppor- 
tunities to  invest  money  such  as  exist  to-day,  and  borrowers 
of  money  generally  sought  loans  in  order  to  provide  funds 
for  meeting  some  misfortune.  Interest  was  also  condemned 
by  the  church  in  the  Middle  Ages.  Show  why  interest  is 
moral  now.  Show  the  modern  difference  between  interest 
and  usury.     When  may  a  high  rate  of  interest  be  immoral? 


INTEREST  305 

2.  Why  is  the  rate  of  interest  for  loans  secured  by  mortgages  on 

farm  lands  higher  in  North  Dakota  than  in  New  York? 

3.  Some  socialists  would  abolish  interest.     What  would  be   the 

result  of  the  abolition  of  interest? 

4.  Savings-banks,  as  a  rule,  paid  to  depositors  4  per  cent  during  the 

year  1 920-1921.  A  larger  rate  of  interest  could  be  secured 
by  investing  in  Liberty  Bonds  or  in  stocks  and  bonds  of 
many  corporations.  Why  should  any  one  deposit  money  in 
savings-banks  under  these  circumstances? 

5.  What  are  the  advantages  of  the  postal  savings-banks  in  en- 

couraging savings  ? 

6.  Some  parents  think  that  school  savings-banks  are  not  worth 

while.  Do  you  agree  with  them?  Why?  What  may  be 
the  benefits  of  school  savings-banks? 


CHAPTER  XXIX 
PROFITS 

Nature  of  Profits. — Rent,  wages,  and  interest  must  be 
paid  before  the  organizer  of  a  business  can  get  any  return 
for  himself.  In  other  words,  they  are  expenses  of  produc- 
tion. After  all  expenses  are  paid,  whatever  remains  is 
profits.  The  person  who  organizes  a  business  may  or  may 
not  take  an  active  part  in  conducting  that  business.  If 
the  organizer  furnishes  his  own  capital,  uses  his  own  land, 
and  himself  conducts  his  business,  he  must  deduct  interest, 
rent,  and  wages  for  himself  before  he  can  consider  that  he 
has  made  a  profit. 

The  Entrepreneur  as  a  Risk  Taker.^-The  entrepreneur 
is  the  person  who  is  responsible  for  conducting  a  business. 
If  the  business  succeeds  he  receives  profits;  if  it  fails  he  is 
the  loser.  For  example,  a  man  decides  to  open  a  creamery. 
He  secures  capital,  rents  land,  constructs  a  building,  hires 
men,  and  begins  to  operate  the  creamery.  If  the  business 
succeeds  he  makes  profits.  His  was  the  risk  and  his  is  the 
reward. 

The  work  of  the  entrepreneur  may  be  divided  between 
two  or  more  men.  In  this  case  the  form  of  organization  is 
usually  a  partnership  or  a  corporation.  Every  member 
shares  the  risk  and  receives  a  part  of  the  profits,  even 
though  the  active  manager  of  a  business  may  not  be  a  part 

306 


PROFITS  307 

owner  and  may  receive  a  salary.  The  wages  of  the  man- 
ager depend  upon  profits.  He  will  not  retain  his  position 
unless  there  are  profits.  What  is  paid  to  the  business 
manager  may  be  considered  wages  and  is  often  called 
wages  of  superintendence,  or  may  be  considered  necessary 
profits,  since  the  business  must  produce  enough  to  pay  for 
such  services. 

The  Nature  of  Business  Risks. — In  all  business  there  is 
risk.  There  may  be  unfavorable  weather,  a  war,  strikes, 
an  epidemic,  a  fire,  a  business  depression,  or  a  number  of 
other  calamities  that  affect  business.  For  example,  in 
farming  there  are  drought,  frost,  insects,  and  blights. 
These  are  risks.  Again  it  may  be  difficult  or  impossible 
to  secure  labor.  Prices  for  produce  may  be  so  low  as  to 
fail  to  meet  expenses.  On  the  other  hand,  through  a  com- 
bination of  favorable  conditions,  the  farmer  may  make 
exceptional  profits.  Although  the  prudent  farmer  antici- 
pates risks  and  provides  against  them,  risk  can  never  be 
wholly  eliminated. 

In  the  manufacture  and  sale  of  clothing,  fashions  may  so 
change  as  to  favor  one  line  of  goods  at  the  expense  of 
another,  or  stocks  may  be  held  in  excess  of  demands. 
Every  business  has  its  risks.  Since  risk-taking  is  necessary 
to  the  conducting  of  business,  it  is  a  legitimate  hazard  and 
has  nothing  in  common  with  gambling.  Nothing  is  added 
to  the  wealth  of  a  country  by  gambling.  Those  who  take 
risks  are  constantly  adding  to  industry. 

Classes  of  Entrepreneurs. — Entrepreneurs  differ  in 
ability.  The  highest  class  is  composed  of  men  of  great 
ability  with  keen  powers  for  analyzing  business  condi- 
tions, who  see  opportunities  and  are  not  afraid  to  follow 


3o8  THE   ELEMENTS   OF   ECONOMICS 

their  judgment.  Marshall  Field,  A.  T.  Stewart,  Stephen 
Girard,  H.  H.  Flagler,  F.  W.  Woolworth,  J.  J.  Hill,  and 
Cyrus  McCormick  are  examples  of  such  entrepreneurs. 
The  large  profits  these  men  made  were  not  the  results  of 
good  fortune  but  were  chiefly  the  result  of  rare  business 
ability. 

A  second  class  of  entrepreneurs  is  composed  of  men  of 
ability,  but  not  of  genius.  This  is  a  much  larger  class  than 
the  first  one.  A  successful  business  man,  who  has  built 
up  a  large  department  store  would  be  an  example  of  this 
class. 

To  the  third  and  most  numerous  class  belong  most  busi- 
ness men.  Except  under  unusual  conditions,  their  profits 
are  not  large.  Such  men  can  generally  secure  the  same 
income  whether  managing  their  own  business  or  working 
for  another. 

Differential  Profits. — Some  business  enterprises  pay 
merely  expenses.  They  continue  in  operation  either  be- 
cause their  capital  is  of  such  a  nature  that  it  cannot  be 
diverted  into  another  business  or  because  there  is  a  pros- 
pect of  a  change  for  the  better  in  the  future.  Many 
street  railroad  companies  during  the  war  operated  at  a 
loss,  but  they  could  not  discontinue  business  without 
destroying  their  capital  and  they  hoped  for  better  con- 
ditions. 

Business  enterprises  whose  capital  may  be  diverted  to 
more  paying  uses  will  not  operate  long  unless  they  can 
pay  all  expenses  and  yield  sufficient  profits  to  make  it 
worth  while  to  continue.  These  enterprises  are  on  the 
margin.  A  business  which  yields  more  than  marginal 
profits  may  be  said   to  have  differential  profits.     Good 


PROFITS     •  309 

managerial  ability  is  a  prime  factor  in  differential  profits. 
A  good  business  man  must  see  that  purchasing  is  done  to 
advantage  as  well  as  selling;  he  must  have  his  place  of 
business  advantageously  situated;  he  must  know  when 
credit  can  be  granted  and  when  withheld;  must  see  that 
machinery  is  properly  used  and  that  the  employees  do 
their  work  well.  Whether  a  business  man  does  these 
things  himself  or  hires  others  to  do  so  for  him  does  not 
change  responsibiUty. 

Extraordinary  Profits. — ^A  new  line  of  industry  which 
produces  something  for  which  there  develops  a  great  de- 
mand may  for  a  time  yield  extraordinary  profits.  The 
first  bicycle  manufacturers  in  the  United  States  were  very 
successful.  Every  one  wanted  to  ride.  Prices  were  high 
and  demand  exceeded  supply.  Extraordinary  profits  sel- 
dom last.  Others  go  into  the  business,  and  supply  is  in- 
creased and  prices  fall.  The  unusual  profits  in  the  bicycle 
business  lasted  only  a  few  years.  Some  monopolies,  on  the 
other  hand,  may  yield  high  profits  indefinitely.  The 
Standard  Oil  Company  has  produced  unusual  profits  since 
the  time  of  its  organization. 

Extraordinary  profits  may  result  from  an  increase  in  the 
price  of  goods.  If  a  dealer  has  on  hand  sugar  purchased 
at  six  cents  a  pound  and  the  price  rises  to  twenty-five  cents 
he  will  have  extraordinary  profits.  Of  course  extraordi- 
nary losses  would  follow  if  the  course  of  events  were  the 
opposite. 

War  Profits. — In  many  lines  of  business  profits  increased 
very  greatly  during  the  World  War.  The  following  table, 
taken  from  Professor  David  Friday's  Profits,  Wages  and 
Prices,  shows  these  profits: 


3IO  THE  ELEMENTS   OF  ECONOMICS 

NET  INCOME  OF  ALL  CORPORATIONS 


Year 

Net  Income 
Before  Taxes 

Federal 
Taxes 

Net  Income 
After  Taxes 

lOOO 

$3,125,481,000 
3,360,251,000 
3,213,706,000 
3,832,151,000 
3,710,600,000 
5,184,400,000 
8,765,900,000 
10,730,360,000 
*9, 500, 000 ,000 

$20,960,000 

33,512,000 

28,583,000 

35,006,000 

39,145,000 

56,973,000 

171,805,000 

2,142,446,000 

*3, 200,000,000 

$3,104,521,000 
3,326,739,000 
3,i85,i23,oto 
3,797,145,000 
3,671,466,000 
5,127,427,000 
8,594,095,000 
8,587,914,000 

*6,30o,ooo,ooo 

IQIO 

IQII 

19 1  2 

I914 

I915 

I916 

IOI7 

1018 .' 

*  Estimated. 

The  figures  given  above  show  that  the  highest  profits 
were  in  191 7.  Since  that  year  they  have  been  declining 
War  industries,  which  brought  large  profits,  ceased  with 
the  armistice,  but  high  profits  continued  until  192 1.  Dur- 
ing and  after  the  war  the  profits  of  various  industries 
differed  widely.  The  net  earnings  of  national  banks,  as 
reported  to  the  comptroller  of  the  currency,  increased 
from  $160,980,084,  or  9.06  per  cent  of  capital  and  surplus 
in  1913,  to  $194,321,000,  or  10.52  per  cent  in  1917,  and  to 
$212,332,000,  or  11.09  P^r  cent,  in  1918.  The  earnings  of 
mining  and  manufacturing  companies  in  191 7  were  reported 
as  330  per  cent  higher  than  1913,  which  was  itself  a  pros- 
perous year.  The  reports  of  mercantile  establishments 
show  greater  profits  than  in  any  line  of  business,  except 
mining  and  manufacturing.  Public  service  corporations 
failed  to  make  satisfactory  profits,  because  their  expenses 
were  increased  while  the  charges  for  the  services  they  ren- 
dered, fixed  by  law,  remained  the  same  or  were  slightly 
increased. 


PROFITS  311 

The  popular  opinion  that  extraordinary  profits  were 
earned  during  the  war  is  justified  by  the  facts.  The  war 
brought  about  conditions  which  made  prices  increase  more 
rapidly  than  the  rise  in  wages  and  the  cost  of  materials. 
Great  demands  from  Europe  for  goods  of  all  kinds 
and  the  transformation  of  thousands  of  industrial  plants 
from  production  of  goods  for  the  civilian  population 
to  production  of  munitions  of  war  resulted  in  many  cases 
in  a  shortage  of  supplies.  In  cases  where  there  was  no 
shortage  the  people  thought  there  was  or  would  be,  and 
the  effect  was  the  same  as  an  actual  shortage.  Hoarding 
of  goods  by  speculators  added  to  the  difficulty.  Under  the 
circumstances  every  one  wanted  to  buy  and  prices  steadily 
rose.  Monopoly  conditions  existed  in  most  industries  and 
prices  were  fixed  at  the  rates  which  would  bring  the  largest 
returns,  the  only  exception  being  those  goods  whose  prices 
were  regulated  by  law. 

From  the  experience,  not  only  of  the  United  States  but 
also  of  other  belligerent  and  neutral  nations,  it  may  be 
said  that  the  ordinary  economic  forces  which  limit  profits 
are  suspended  in  times  of  great  wars  and  most  industries 
find  it  possible  to  charge  monopoly  prices.  These  con- 
ditions remain  until  war  conditions  cease  and  industries 
return  to  peace  conditions. 

Summary. — Profits  are  a  surplus  after  all  the  expenses  of 
a  business  have  been  paid.  All  business  has  risks.  The 
entrepreneur  is  a  risk-taker.  He  must  make  profits  or  lose 
his  position.  Entrepreneurs  differ  in  ability.  Those  who 
have  unusual  ability  may  produce  unusual  returns  in  the 
form  of  differential  profits.  Extraordinary  profits  may 
result  from  industries  which  supply  some  new  article,  or 


312  THE   ELEMENTS   OF   ECONOMICS 

through  fortunate  purchases.  Except  in  case  of  monopoly 
extraordinary  profits  seldom  last  long.  The  World  War 
brought  about  exceptional  conditions  and  there  were  un- 
usual profits  to  many.  With  a  return  to  peace  conditions 
profits  gradually  became  normal. 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1.  The   Woolworth   Building   in   New  York   City,  called   "The 

Cathedral  of  Commerce,"  was  built  from  the  profits  of  five 
and  ten  cent  stores.  The  profits  on  each  sale  were  small 
but  there  were  millions  of  sales.  Why  could  Mr.  Woolworth 
be  regarded  as  an  entrepreneur  of  exceptional  talents? 

2.  Russell  Sage  once  remarked  that  the  secret  of  making  money 

in  stocks  and  bonds  is  in  buying  when  every  one  else  wants 
to  sell  and  selling  when  others  want  to  buy.  Why  do  so 
many  people  want  to  buy  at  certain  times  ?  What  were  the 
results  of  the  mania  for  buying  sugar  during  the  Great  War  ? 

3.  What  effect  did  the  Great  War  have  upon  the  profits  of  the 

street  railroads  of  your  city  ?     Why  ?    . 

4.  What  lines  of  business  yielded  extraordinary  profits  during  the 

Great  War?  Why? 

5.  Why  do  profits  tend  to  be  the  same  in  all  industries?     What 

prevents  the  rate  of  profits  from  being  the  same  ? 


CHAPTER  XXX 
SOME  PROPOSED  RADICAL  ECONOMIC   CHANGES 

The  Single  Tax. — In  the  year  1879  Henry  George  pub- 
Hshed  Progress  and  Poverty.  His  main  object  was  to 
show  that  rent  tends  to  increase  while  profits  and  wages 
tend  to  diminish.  Progress  and  poverty,  he  maintained,  go 
hand  in  hand.  To  remedy  the  alleged  evil,  he  advocated 
a  single  tax  on  land  which  would  be  equal  to  the  rent  of 
the  land.  All  other  taxes  were  to  be  abolished.  The  re- 
sults, he  thought,  would  be  to  "raise  wages,  increase  the 
earnings  of  capital,  extirpate  pauperism,  abolish  poverty,, 
give  remunerative  employment  to  whoever  wishes  it,  afford 
free  scope  to  human  powers,  lessen  crimes,  elevate  morals 
and  taste  and  intelligence,  purify  government,  and  carry 
civilization  to  nobler  heights." 

His  arguments  in  favor  of  the  plan  were  twofold.  In 
the  first  place  he  affirmed  that  land  is  a  natural  product 
and  not  the  result  of  labor,  and  that  every  person  has  a. 
natural  right  to  the  occupation  of  land.  "Let  the  parch- 
ments be  ever  so  many,  or  possession  ever  so  long,  natural 
justice  can  recognize  no  right  in  one  man  to  the  possession 
of  land  that  is  not  equally  the  right  of  all  his  fellows. '* 
"Though  his  titles  have  been  acquiesced  in  by  generation 
after  generation,  to  the  landed  estates  of  the  Duke  of 
Westminster  the  poorest  child  that  is  born  in  London  has 
just  as  much  right  as  has  his  eldest  son.  Though  the 
sovereign  people  of  the  State  of  New  York  consent  to  the 

313 


314  THE   ELEMENTS   OF   ECONOMICS 

landed  possessions  of  the  Astors,  th^  puniest  infant  that 
comes  wailing  into  the  world,  in  the  squalidest  room  of 
the  most  miserable  tenement  house,  becomes  at  that 
moment  seized  of  an  equal  right  with  the  millionaire.'* 

The  quotations  given  above  illustrate  the  natural-right 
claims  made  in  Progress  and  Poverty.  They  are  not  argu- 
ments but  statements  of  opinion.  To  the  natural-right 
opinion  a  conclusive  answer  is  that  private  property  in 
land  exists  because  it  is  regarded  as  beneficial  to  most 
people.  In  order  to  show  that  private  property  in  land 
should  be  abolished,  it  must  be  proved  that  some  other 
plan  would  be  better.  Henry  George  tries  to  prove  this 
by  three  main  arguments: 

1.  Rent  is  an  '^unearned  increment.''  The  owner  of 
land  need  merely  hold  his  land  and  benefit  by  the  rise  in 
rent.  This  rise  in  rent  is  not  due  to  any  labor  on  the  part 
of  the  owner,  but  is  due  to  growth  in  population  and  to 
public  improvements.  It  is  therefore  just  and  fitting  that 
society  should  take  what  it  creates.  An  example  of  ''un- 
earned increment"  is  afforded  by  the  Astor  property  in 
New  York  City.  John  Jacob  Astor,  early  in  the  nine- 
teenth century,  invested  his  earnings  in  land  on  Manhattan 
Island.  His  descendants  now  enjoy  annually  milhons  of 
dollars  of  income  from  this  land. 

2.  A  second  argument  is  that  if  land  were  taxed  to  its 
full  rental  value,  every  one  owning  land  would  be  obliged 
to  use  it  or  abandon  it  to  others  who  would  use  it.  No 
land  could  be  held  for  speculative  purposes.  Not  only 
would  land  be  thrown  open  to  use,  but  a  tax  that  would 
take  all  rent  would  result  in  compelling  landlords,  who 
live  wholly  upon  the  proceeds  of  rent,  to  engage  in  some 


PROPOSED   RADICAL  ECONOMIC   CHANGES      315 

useful  occupation  and  would  thus  increase  production  of 
wealth  by  abolishing  an  idle  class. 

3.  The  final  argument  is  that  a  single  tax  on  land  would 
stimulate  all  industry  through  abolishing  all  other  forms 
of  taxation.  This,  we  are  told,  would  result  in  such  general 
prosperity  as  to  abolish  poverty. 

Arguments  against  the  Single  Tax.— Those  who  oppose 
the  single  tax  upon  land  say  that  such  a  tax  would  be  un- 
just. It  would  destroy  the  selling  value  of  the  land  and 
thus  deprive  the  landowner  of  his  property  without  his 
consent.  The  man  who  has  invested  $2,000  in  a  lot  for 
his  home  would  find  himself  deprived  of  the  value  of  his 
investment,  but  his  neighbor  who  has  invested  $2,000  in 
the  stock  of  some  monopoly  would  pay  nothing  in  taxes  on 
his  investment. 

Another  objection  is  that  land  is  not  the  only  thing  that 
yields  an  unearned  income.  A  fortunate  investment  in 
the  stock  of  some  corporation  may  result  in  a  profit  of 
several  hundred  per  cent.  This  is  an  "unearned  incre^ 
ment"  and  it  would  not  be  fair  to  tax  one  "unearned  incre- 
ment" and  let  another  go  scot-free.  Then,  again,  land  does 
not  always  rise  in  value.  It  sometimes  falls.  Changes  in 
the  character  of  the  population,  the  building  of  a  hospital 
or  jail,  or  changes  in  lines  of  transportation  are  among  the 
causes  which  lower  the  value  of  land.  This  lessening  of 
value  may  be  called  "an  unearned  decrement,"  and  the 
owner  of  land  which  has  fallen  in  value  might  claim  that 
he  is  entitled  to  compensation  for  his  loss. 

It  should  also  be  remembered  that  the  rise  in  the  value 
of  land  is  not  entirely  an  "unearned  increment."  The 
land  policy  of  the  United  States  has  been  to  encourage 


3i6  THE   ELEMENTS   OF   ECONOMICS 

actual  settlers  upon  the  public  domain,  and  the  United 
States  has  given  the  settlers  the  land,  or  sold  it  to  them  for 
small  payments,  in  order  that  the  country  may  grow. 
The  settlers  cleared  the  land  and  made  great  sacrifices  in 
the  hope  of  future  reward.  Some  of  them  did  reap  the 
rewards  of  their  sacrifices,  but  some  did  not.  Where  suc- 
cess was  obtained,  the  land  was  usually  improved  by  its 
owner.  Draining  swampy  land  or  fertilizing  sterile  land, 
or  clearing  away  stones  and  underbrush,  is  increasing  the 
value  of  land  by  labor,  and  labor  is  entitled  to  its  reward. 

The  single  tax  would  be  unwise  because  it  would  make 
impossible  other  desirable  taxes.  For  example,  a  protec- 
tive tariff  might  be  desirable,  or  a  tax  on  inheritance  might 
be  considered  a  suitable  method  of  limiting  inheritances. 

A  most  serious  objection  to  the  single  tax  lies  in  its 
inelasticity.  The  returns  from  a  single  tax  on  land  might 
be  expected  to  rise  in  an  advancing  community,  but  there 
is  no  way  in  which  such  a  tax  would  meet  the  demands  for 
an  increased  revenue  which  would  be  occasioned  by  war 
or  the  need  of  some  great  improvement. 

Anarchism. — ^All  exercise  of  authority  is  objectionable 
to  the  anarchist.  He  would  abolish  government  and  the 
present  methods  of  business  whether  conducted  by  indi- 
viduals, associations,  or  by  the  government.  He  assumes 
that  men  would  do  what  is  right  if  all  compulsion  were  re- 
moved. This  is  not  true.  There  are  persons  in  every 
community  who  must  be  restrained  from  evil  actions. 
Anarchy  would  bring  about  a  reign  of  terror,  in  which  the 
strong  would  profit  at  the  expense  of  the  weak,  and  the 
depraved  would  do  as  they  pleased.  The  anarchists  think 
that,  compulsion  being  removed,  men  would  unite  in  co- 


PROPOSED    RADICAL   ECONOMIC    CHANGES      317 

operative  groups  for  the  production  of  wealth  and  would 
share  the  proceeds  among  themselves  in  a  manner  mutu- 
ally satisfactory.  However,  unless  men  were  perfect,  there 
would  be  sure  to  arise  disputes  in  regard  to  the  amount  of 
work  each  should  perform  and  in  regard  to  the  share  each 
should  receive.  Nor  would  any  one  care  to  work  unless 
he  could  be  sure  that  there  was  some  guarantee  that  he 
could  retain  property  after  he  had  secured  it.  Contrary 
to  general  opinion,  there  are  some  peaceful  anarchists,  who 
regard  anarchy  as  a  possibility  in  the  far-distant  future. 
The  dangerous  anarchist,  who  advocates  violence  in  over- 
throwing all  governments,  is  an  enemy  of  society  and  must 
be  suppressed  as  such. 

Communism. — Commimists  desire  the  common  owner- 
ship of  capital  and  equal  distribution  of  the  proceeds  of 
mdustry  among  the  workers.  Long  ago  Aristotle  said 
that  a  fatal  objection  to  communism  is  that  the  business 
of  all  is  the  business  of  none.  Any  economic  system  that 
does  not  reward  people  in  proportion  to  their  abilities  and 
industry  can  never  succeed. 

There  have  been  many  communistic  experiments  in 
Europe  and  America.  Most  of  them  have  failed  and  the 
survivors  are  destined  to  fail.  Some  have  failed  because 
their  founders  had  peculiar  religious  beliefs  and  when  the 
founders  died  their  children  refused  to  accept  the  faith  of 
their  fathers.  Others  failed  because  their  members  could 
talk  communism  but  found  it  irksome  to  practise  it. 
However,  the  chief  reason  for  failure  is  that  communism 
is  not  satisfactory  to  most  people  at  any  time  and  does 
not  long  prove  satisfactory  to  any  but  a  few. 

Among  the  many  communistic  experiments  in  America, 


3i8  THE  ELEMENTS   OF  ECONOMICS 

that  organized  in  1848  by  Mr.  John  H.  Noyes  deserves 
mention.  The  community  was  started  in  Vermont,  but 
soon  moved  to  Oneida,  New  York,  where  it  existed  under 
a  communistic  plan  until  1879,  when  its  members  aban- 
doned communism  and  organized  as  a  joint-stock  company 
imder  the  name  of  the  Oneida  Community. 

Another  communistic  experiment  that  attracted  wide 
attention  was  organized  by  Mr.  Robert  Owen  at  New 
Harmony,  Indiana.  Owen  came  to  this  country  from 
England  in  1822.  He  had  wealth,  enthusiasm,  and  ability. 
If  communism  were  ever  to  succeed  this  was  its  oppor- 
tunity.    It  failed  after  two  years. 

Socialism. — Socialism  and  anarchism  have  little  in  com- 
mon. The  socialist  would  increase  authority,  while  the 
anarchist  would  aboHsh  it.  The  anarchist  considers 
socialism  as  ^' state  capitalism,"  and  he  is  opposed  to  all 
capitalism. 

There  are  many  forms  of  socialism,  but  they  all  agree 
in  certain  fundamentals.  These  are  the  common  owner- 
ship and  operation  of  the  chief  material  means  of  produc- 
tion. Under  a  socialistic  state  most  persons  would  be 
employed  by  the  government,  would  be  paid  wages,  not 
necessarily  equal,  and  could  spend  them  as  they  wished,  ex- 
cept that  they  could  not  establish  factories  or  other  agen- 
cies for  the  production  of  wealth.  Most  socialists  would 
not  object  to  such  small  matters  as  a  private  person  selling 
a  part  of  the  products  of  a  garden,  selling  a  few  eggs  or 
doing  odd  jobs  in  his  spare  time.  Some  socialists  would 
prohibit  all  private  production  of  utilities,  but  the  ten- 
dency among  socialists  is  to  consider  small  matters  as  of 
no  consequence.     Mr.  John  Spargo,  an  American  socialist, 


PROPOSED   RADICAL   ECONOMIC   CHANGES      319 

describes  the  program  of  the  most  moderate  socialists,  as 
follows;  "The  new  society  must  include  at  least  the  fol- 
lowing: (i)  Ownership  of  all  natural  resources,  such  as 
land,  mines,  forests,  oil-wells,  and  so  on;  (2)  operation  of 
all  the  means  of  transportation  and  communication,  other 
than  those  of  purely  personal  service;  (3)  operation  of  all 
industrial  production  involving  large  capital  and  associated 
labor,  except  when  carried  on  by  voluntary,  democratic 
co-operation;  (4)  organization  oi  all  labor  essential  to  the 
public  service,  such  as  the  building  of  schools,  hospitals, 
docks,  bridges,  sewers,  and  the  like;  the  construction  of 
all  the  machinery  and  plant*  requisite  to  the  social  pro- 
duction and  distribution,  and  of  all  things  necessary  for 
the  maintenance  of  those  engaged  in  such  public  service  as 
the  national  defense,  and  all  who  are  the  wards  of  the 
State;  (5)  a  monopoly  of  the  monetary  and  credit  func- 
tions, including  coinage,  mortgaging,  and  the  extension  of 
credit  to  private  enterprise.  With  these  economic  activi- 
ties undertaken  by  the  State,  a  pure  democracy  differing 
vitally  from  all  the  class-dominated  states  of  history,  pri- 
vate enterprise  would  by  no  means  be  excluded,  but  limited 
to  an  extent  making  the,  exploitation  of  public  interests  and 
needs  for  private  gain  impossible."  Most  socialists  ob- 
ject to  Spargo's  program  as  leaving  too  much  to  private 
initiative. 

Arguments  for  Socialism  Examined. — The  method  of 
socialists  is  to  attack  the  present  industrial  order.  They 
claim  that  "nine- tenths  of  the  wealth  of  the  nation  is  con- 
trolled by  one-tenth  of  the  people"  and  that  every  year 
shows  a  greater  concentration  of  ownership  of  wealth. 
Such   statements   have   frequently   been   made,   but   not 


320  THE  ELEMENTS   OF  ECONOMICS 

proved.  The  facts,  as  disclosed  by  the  income-tax  returns 
of  1 91 8,  are  different.  The  returns  of  net  income  show- 
that  people  with  incomes  of  $5,000  or  less  received  59  per 
cent  of  the  total  incomes  reported,  and  those  whose  in- 
comes were  over  $5,000  a  year  received  41  per  cent.  It 
might  therefore  seem  that  though  only  10.83  P^r  cent  of 
those  reporting  had  incomes  of  over  $5,000  their  total 
incomes  were  41  per  cent  of  the  net  incomes  reported. 
However,  this  is  not  the  whole  story.  The  -total  net 
incomes  reported    amounted    to    less    than   $16,000,000,- 

000  and  this  'is  certainly  less  than  the  annual  income 
produced  by  the  industries  of  the  United  States.  The 
difference  between  the  amounts  reported  and  the  actual 
product  of  all  industry  is  explained  by  the  fact  that  in- 
come taxes  were  paid  by  only  4,425,114  persons,  or  about 

1  in  22  of  the  population.  A  large  number  of  people  whose 
income  was  small  were  exempted  from  making  returns  and 
many  others  made  no  returns.  It  is  easier  for  a  person  of 
small  income  to  escape  the  income  tax  than  for  a  person  of 
large  income.  With  these  facts  taken  into  consideration, 
it  is  estimated  that  89  per  cent  of  the  total  income  goes  to 
those  whose  incomes  are  less  than  $5,000.  This  does  not 
show  a  great  concentration  in  the  ownership  of  wealth. 
So  far  as  the  laboring  classes  are  concerned,  wages  both 
as  measured  in  money  and  in  purchasing  power  have 
steadily  increased  in  the  last  40.  years,  a  fact  which  the 
socialists  cannot  deny. 

The  socialists  also  claim  that  labor  does  not  get  the  full 
product  of  its  toil  but  is  the  victim  of  exploitation.  For 
example,  if  a  laborer  produces  with  the  aid  of  a  machine 
articles  which  sell  for  $500  and   the  laborer  receives  in 


PROPOSED   RADICAL   ECONOMIC   CHANGES      321 

wages  $300  the  socialists  say  he  i^  robbed  of  $200.  The 
owner  of  the  machine,  they  say,  should  be  the  people. 
This  does  not  prove  that  the  laborer  would  himself  receive 
more  under  socialism,  and  he  might  get  less.  The  socialist 
forgets  that  saving  was  necessary  to  produce  the  machine, 
that  the  inventor  and  maker  of  the  machine  are  entitled 
to  their  rewards,  and  that  the  manager  of  the  industry  and 
many  others  must  haVe  some  consideration.  Moreover,  if 
a  dozen  men  are  working  to  produce  one  article,  who  can 
tell  what  part  of  the  value  of  the  article  is  produced  by  any 
one  man?  Socialists  talk  about  distributive  justice,  but 
fail  to  agree  among  themselves  as  to  what  is  justice. 

Another  criticism  of  the  present  industrial  order  is  con- 
cerned with  the  evils  of  competition.  Under  the  com- 
petitive system  there  is  much  waste.  For  example,  a  half 
dozen  milk  wagons  go  over  a  route  which  might  be  served 
by  one.  Competition  has  more  serious  evils  than  waste. 
It  causes  men  to  adulterate  food,  use  child  labor,  and 
sometimes  oppress  workmen.  The  standard  of  the  worst,  it 
is  alleged,  tends  to  become  the  standard  of  all  employers. 

There  are  many  faults  in  the  present  industrial  system, 
but  legislation  can  remedy  most  of  them.  Will  socialism 
improve  matters?  Some  industries  might  be  organized 
under  the  socialistic  plan,  but  not  the  most  important  of 
all  American  industries,  that  of  farming.  The  competi- 
tive system  gives  an  incentive  to  the  farmer  to  rise  early 
and  work  late  and  he  does  not  consider  himself  a  victim  of 
exploitation.  Would  socialism  furnish  an  incentive  equal 
to  self-interest?  Most  people  think  not.  His  income 
would  not  depend  upon  his  own  work.  His  work  being 
isolated  could  not  be  supervised  unless  there  should  be  an 


322  THE  ELEMENTS   OF  ECONOMICS 

inspector  for  each  farm  and  a  corps  of  inspectors  for  the 
inspectors.  The  endeavor  to  socialize  the  farms  of  Russia 
failed.  There  is  every  reason  to  suppose  that  such  at- 
tempts will  always  fail. 

A  favorite  argument  of  the  socialist  is  that  under  the 
present  industrial  regime  many  people  have  no  chance. 
Wealth  and  poverty  depend  upon  the  accident  of  birth. 
Some  start  life  with  great  advantages;  others  have  little  or 
no  chance  of  success.  There  is  truth  in  this  statement, 
but  less  truth  than  ever  before.  Child  labor  is  being  abol- 
ished, parks  and  playgrounds  give  a  better  life  for  the 
young,  tenement-house  reform  has  done  much  to  benefit 
housing  conditions,  intoxicating  liquors  will  soon  be  unob- 
tainable for  beverage  purposes,  every  child  can  now  obtain 
an  education,  and  alm^ost  every  boy  or  girl  ^ho  really  so 
wishes  may  obtain  a  college  education.  Socialists  picture 
the  socialistic  state  in  too  bright  colors  and  see  only  the 
gloom  in  the  present.  America  is  still  the  land  of  oppor- 
tunity and  was  never  more  so  than  to-day. 

Summary. — In  this  chapter  we  have  examined  three 
radical  programs  for  economic  changes.  Henry  George 
was  not  a  socialist.  He  believed  in  the  present  indus- 
trial system,  but  thought  it  needed  the  single  tax  to  make 
it  perfect.  His  chief  arguments  are:  (i)  Rent  is  an  un- 
earned income;  (2)  taxing  land  to  its  full  rental  value 
would  prevent  withholding  land  from  use  for  speculative 
purposes;  (3)  by  abolishing  all  other  taxes  industry  would 
be  promoted.  We  have  seen  that  rent  is  not  the  only 
"unearned  increment'^  and  hence  it  would  be  unfair  to 
take  all  of  the  rent  of  land  and  not  tax  other  unearned 
incomes.     Moreover,  much  of  the  value  of  rural  land  has 


PROPOSED   RADICAL  ECONOMIC   CHANGES      323 

been  made  by  labor  and  is  earned.  The  single  tax  would 
abolish  desirable  taxes.     It  would  also  be  inelastic. 

Anarchism  is  a  radical  theory  based  upon  the  belief 
that  all  exercise  of  authority  by  one  person  over  another 
is  evil.  It  is  a  philosophy  of  extreme  individualism.  Com- 
pulsion is  necessary  in  order  to  preserve  order  and  to  pro- 
tect the  weak  from  the  strong  and  the  honest  from  the 
dishonest.  Anarchism  would  produce  a  reign  of  terror, 
unless  all  men  were  perfect. 

The  communists  advocate  the  common  ownership  of 
most  goods  and  equal  distribution  of  the  proceeds  of 
industry.  The  fatal  defect  of  communism  is  that  it  gives 
no  incentive  to  the  more  capable  and  the  more  industrious 
members  of  society.  It  also  fails  to  recognize  that  men 
like  to  have  property  which  is  their  own. 

Socialists  desire  the  common  ownership  and  operation 
of  factories,  railroads,  stores,  and  other  means  of  producing 
wealth.  The  socialists  would  permit  private  property  in 
most  goods  for  personal  use.  The  claim  of  socialists  that 
^'the  rich  are  growing  richer  and  the  poor  are  growing 
poorer"  is  proved  false  by  the  income-tax  returns.  The 
sociahsts  claim  that  the  present  industrial  system  is  evil, 
but  they  fail  to  see  that  there  is  much  good  in  it.  The 
evil  may  be  eliminated  to  a  great  extent.  The  socialists 
do  not  agree  upon  what  is  distributive  justice.  Some 
industries  might  be  socialized,  but  not  farming.  The 
socialists  are  too  pessimistic  in  regard  to  the  possibilities 
of  the  present  order  and  too  optimistic  in  regard  to 
socialism. 


324  THE   ELEMENTS   OF   ECONOMICS 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND  SPECIAL  REPORTS 

1.  What  land  in  your  city  has  risen  in  value  during  the  last  ten 

years?     What  land  has  fallen  in  value?     What  caused  the 
changes  in  value? 

2.  Give  the  history  of  some  communistic  experiment  in  America. 

3.  Compare  socialism  and  anarchy. 

4.  What  do  you  consider  the  strongest  point  in  favor  of  socialism  ? 

Why?     What  do  you  consider  its  weakest  point?  Why? 

5.  Is  our  industrial  system  chiefly  good  with  a  few  bad  spots  or 

chiefly  bad  with  a  few  good  spots?     Name  some  of  the  bad 
and  some  of  the  good  features. 

6.  What  unearned  increments,  other  than  land  values,  exist  in  the 

United  States? 


CHAPTER  XXXI 
PUBLIC  FINANCE 

Publip  and  Private  Finance  Compared. — Public  finance 
is  that  branch  of  economics  which  deals  with  the  income 
and  expenses  of  government.  Public  finance  differs  from 
private  finance  in  three  important  particulars:  (i)  The 
income  of  a  government  should  be  so  arranged  as  to  meet 
its  necessary  expenses.  Individuals  should  arrange  their 
expenses  to  fall  within  their  income;  (2)  a  surplus  for  a 
government  is  not  desirable — it  indicates  that  more  has 
been  taken  from  the  pockets  of  the  people  than  was  neces- 
sary for  the  needs  of  the  government  and  invites  legis- 
lative bodies  to  make  reckless  expenditures;  (3)  public 
finance  rests  upon  the  power  of  compulsion.  A  state  may 
compel  the  people  to  contribute  to  its  support. 

The  Budget. — ^A  budget  is  a  statement  of  probable 
revenue  and  expenditure  and  of  financial  proposals  for  the 
coming  year.  It  is  usual  to  speak  of  a  budget  submitted 
to  a  legislative  body  as  a  tentative  budget;  when  it  has 
been  adopted  it  becomes  the  budget.  The  advantages  of 
a  budget  for  a  government  are  similar  to  those  for  a  family. 
Expenditures  are  fixed  in  relation  to  one  another  and  a 
limitation  is  placed  upon  them. 

Growth  in  Public  Expenses. — Expenses  of  local,  state, 
and  national  governments  have  increased  vastly  in  the  last 
quarter  of  a  century.     This  increase  is  due  both  to  in- 

32s 


326  THE   ELEMENTS   OF  ECONOMICS 

creased  wealth  and  the  additional  duties  which  govern- 
ments have  assumed.  The  growth  of  expenditures  for 
schools  is  an  illustration.  At  first  the  people  were  content 
with  primary  education  at  pubHc  expense.  Then  were 
added  the  upper  grades  and  the  high  schools.  Now  there 
are  municipal  colleges  and  universities,  and  most  states 
support  great  public  universities.  Free  text-books,  better 
school  buildings,  and  higher  salaries  for  teachers  have  in- 
creased expenses,  but  the  results  have  justified  the  expense. 
Similar  increases  in  the  expense  for  the  preservation  of 
order,  protection  against  fire,  guarding  the  public  health, 
providing  for  the  poor,  and  other  necessary  duties  of 
government  might  be  cited. 

The  expense  of  state  governments  has  not  increased  so 
rapidly  as  that  of  local  governments,  but  the  increase  has 
been  considerable.  The  growth  of  state  expenses  has  been 
in  part  due  to  the  supervision  which  states  have  under- 
taken, usually  by  means  of  commissions,  in  looking  after 
the  interest  of  the  people  in  banking,  insurance,  railroads, 
and  other  public  utilities.  State  penal  and  charitable 
institutions  have  become  increasingly  efficient  and  increas- 
ingly expensive.  With  the  coming  of  automobiles  road- 
building  has  become  a  state  function.  The  expenses  of 
the  national  government  have  increased,  both  through 
doing  its  former  work  better  and  assuming  new  duties. 
The  largest  item  in  the  budgets  of  all  the  great  nations  is 
in  paying  the  expenses  of  past  wars  and  providing  for 
possible  future  wars.  Unless  the  nations  of  the  world  can 
agree  to  settle  their  differences  by  some  other  method  than 
war,  expense  for  national  defense  will  continue  to  increase. 

The  following  table  shows  the  expense  of  the  United 


PUBLIC   FINANCE 


327 


States  for  the  army  and  navy  during  the  years  immediately 
before  the  World  War. 


Year 

Army 

Navy 

Total 

iSoq 

$54,500,000 

117,900,000 

94,300,000 

$31,700,000 
110,500,000 
140,700,000 

$86,200,000 
228,400,000 
243,000,000 

1906 

1014 

The  cost  of  and  preparation  for  wars  constitute  the  great- 
est expense  of  all  national  governments,  because  included  in 
the  expense  for  wars  must  be  included  interest  on  the  war 
debt,  pensions  for  soldiers,  and  provision  for  paying  the 
debt.  The  net  cost  of  the  World  War  to  the  United  States 
was  fixed  by  Secretary  Houston  at  $24,010,000,000. 

Public  Revenue. — Public  income  is  obtained  from  a 
variety  of  sources.  In  his  Science  of  Finance,  Professor 
Henry  C.  Adams  gives  the  following  classification  of  public 
revenue: 


Direct  revenue 


Derivative 

revenue 

Anticipatory 
revenue 


(: 


Public  domains. 

Public  industries. 

Gratuities  or  gifts,  or  treasure-trove. 

Confiscations  and  indemnities. 

Taxes. 
Fees. 

Assessments. 
Fines  and  penalties. 

Sale  of  bonds  or  other  forms  of  credit. 
Treasury  notes. 


Public  domains  were  once  an  important  source  of  revenue 
and  many  foreign  governments  now  derive  revenue  from 
forests,  mines,  and  agricultural  lands.     The  United  States 


328  THE   ELEMENTS   OF   ECONOMICS 

has  disposed  of  most  of  its  old  domains  to  settlers,  but 
recently  it  has  acquired  large  forest  preserves,  as  have 
some  of  the  states,  and  these  will  at  some  time  in  the  future 
bring  some  revenue  to  the  treasury.  Public  industries 
such  as  water-works,  lighting  plants,  postal  service,  street 
railroads,  and  steam  railroads  bring  substantial  revenues  to 
many  foreign  governments,  but  in  the  United  States  most 
of  these  services  are  performed  by  private  corporations  or 
are  operated  not  for  revenue  but  for  service  to  the  people. 
Special  assessments  are  often  levied  upon  land  adjoining  a 
projected  improvement  for  the  purpose  of  paying  for  all 
or  a  part  of  the  improvement.  This  is  reasonable  and 
proper,  as  the  adjoining  property  will  increase  in  value  as 
a  result  of  the  improvement.  Part  of  the  expense  for 
parks,  opening  new  streets,  constructing  sewers,  and  like 
improvements  is  often  met  in  this  way.  For  extraordinary 
expenses  or  for  anticipating  the  receipt  of  taxes,  public 
loans  are  extensively  used  by  local,  state,  and  national 
governments.  However,  taxation  is  by  far  the  most  im- 
portant source  of  revenue.  A  tax  may  be  defined  as  a 
compulsory  payment  to  the  government  for  general  public 
purposes. 

Adam  Smith's  Canons  of  Taxation. — In  his  celebrated 
work.  The  Wealth  of  Nations,  Adam  Smith  gave  four 
canons  of  taxation  which  have  gained  general  approval. 
"The  subjects  of  every  State  ought  to  contribute  towards 
the  support  of  the  government,  as  nearly  as  possible,  in 
proportion  to  their  respective  abilities;  that  is,  in  propor- 
tion to  the  revenue  which  they  respectively  enjoy  under 
the  protection  of  the  State."  This  canon  of  taxation,  once 
invoked  in  behalf  of  proportional  taxation  is  now  held  to 


PUBLIC   FINANCE  329 

justify  progressive  taxation.  Proportional  taxation  is  taxa- 
tion at  a  fixed  rate  no  matter  how  large  the  property  may 
be,  while  progressive  taxation  requires  a  rate  increasing 
with  the  amount  of  property.  For  example,  to  tax  all 
incomes  at  4  per  cent  would  be  proportional  taxation,  but 
to  tax  incomes  of  between  $2,000  and  $4,000  at  4  per  cent 
and  incomes  of  between  $4,000  and  $6,000  at  5  per  cent 
and  incomes  of  over  $6,000  at  8  per  cent  would  be  pro- 
gressive taxation.  The  justification  of  progressive  taxa- 
tion is  that  the  burden  of  a  tax  of  4  per  cent  on  $2,000  is  as 
great  as  the  burden  of  a  tax  of  8  per  cent  upon  $7,000,  in 
the  former  case  $1,920  would  remain  after  paying  the  tax, 
and  in  the  latter  case  $6,440.  The  marginal  utility  of 
$80  to  the  average  man  having  an  income  of  $2,000  is  as 
great  as  the  marginal  utility  of  $560  to  .the  average  man 
having  an  income  of  $7,000. 

The  second  of  Adam  Smith's  canons  is  self-explanatory: 
''The  tax  which  each  individual  is  bound  to  pay  ought  to 
be  certain,  and  not  arbitrary.  The  time  of  payment,  the 
quantity  to  be  paid,  ought  all  to  be  clear  and  plain  to  the 
contributor  and  to  every  other  person." 

The  third  canon  is  that  ''every  tax  ought  to  be  levied 
at  the  time,  or  in  the  manner  in  which  it  is  most  likely  to 
be  eonvenient  for  the  contributor  to  pay  it."  For  exam- 
ple, farmers  would  find  November  a  convenient  time  as 
the  crops  are  sold  by  that  time.  Convenience  sometimes 
would  be  better  secured  by  having  taxes  payable  in  two  in- 
stalments, in  May  and  November,  than  to  have  the  entire 
amount  payable  in  one  instalment. 

The  fourth  canon  of  taxation  states  in  substance  that  a 
lax  which  costs  much  to  collect  is  a  poor  tax.     "Every 


330  THE   ELEMENTS   OF   ECONOMICS 

tax  ought  to.be  so  contrived  as  to  both  take  out  and  keep 
out  of  the  pockets  of  the  people  as  Uttle  as  possible  over 
and  above  what  it  brings  into  the  public  treasury  of  the 
State." 

Direct  and  Indirect  Taxation. — ^A  direct  tax  is  one  which 
is  levied  upon  the  person  who  must  finally  pay  it.  Income 
taxes,  poll  taxes,  taxes  on  land,  and  inheritance  taxes,  are 
examples  of  direct  taxes.  An  indirect  tax  is  one  that  is 
shifted  from  the  person  who  first  pays  it  to  another.  Cus- 
toms duties,  and  taxes  on  articles  produced  within  a  coun- 
try are  examples  of  indirect  taxes. 

Direct  taxes  have  advantages  over  indirect  taxes.  In- 
direct taxation  seldom  places  the  burden  of  a  tax  upon  the 
people  in  proportion  to  their  ability  to  bear  it.  For 
example,  a  tax  upon  sugar  would  be  shifted  to  the  final 
consumer  and  as  people  do  not  consume  sugar  in  propor- 
tion to  their  wealth  such  a  tax  would  be  a  greater  burden 
upon  the  poor  than  upon  the  wealthy. 

There  is  also  a  political  objection  to  indirect  taxation. 
It  is  a  well-known  fact  that  people  are  more  interested  in 
good  government  if  they  pay  direct  taxes.  They  may  pay 
more  in  indirect  taxes,  but  they  do  not  know  it.  Paying 
taxes  is  a  patriotic  duty. 

A  third  disadvantage  of  indirect  taxation  is  that  taxes 
of  this  sort  are  inelastic.  The  amount  raised  by  indirect 
taxes  cannot  easily  be  changed  from  year  to  year.  In- 
creasing the  tax  may  so  reduce  consumption  as  to  cause 
the  returns  from  the  tax  to  grow  less. 

However,  indirect  taxes  have  some  advantages.  They 
enable  people  to  pay  taxes  in  small  amounts,  as  a  few 
cents  are  paid  when  buying  tobacco,  clothing,  and  other 


PUBLIC   FINANCE  331 

articles.     Indirect  taxation  is  employed  by  every  national 
government. 

Taxes  on  Imports. — ^Until  the  adoption  of  the  income 
tax,  the  customs  duties  were  the  largest  items  in  the 
regular  income  of  the  United  States.  The  revenue  from 
customs  in  1910  was  $333,683,445  and  the  internal  revenue 
was  $289,957,220.  In  1920  the  customs  duties  gave  a 
revenue  of  $332,902,650  and  the  income  and  profits 
yielded  $3,944,949,288.  There  are  three  kinds  of  customs 
duties: 

1.  Specific  duties.  These  are  assessed  on  a  unit  of 
measure  such  as  a  pound,  a  yard,  or  a  gallon.  Specific 
duties  may  result  in  taxing  articles  of  low  value  as  high 
as  those  of  large  value.  For  example,  if  there  is  a  tax  of 
fifty  cents  on  a  yard  of  silk,  it  is  a  tax  of  100  per  cent  on  a 
yard  worth  fifty  cents  and  a  tax  of  25  per  cent  on  a  yard 
worth  two  dollars.  Specific  duties  are  used  to  a  limited 
extent  by  the  United  States. 

2.  Ad  Valorem  Duties.  These  duties  are  levied  on  the 
value  of  imported  articles.  Under  this  plan  there  is  a 
great  temptation  to  undervalue  goods  and  the  collectors 
must  be  men  of  ability  and  integrity.  The  United  States 
extensively  uses  ad  valorem  duties. 

3.  Combination  Duties.  In  the  United  States  there  is 
frequently  a  combination  of  specific  and  ad  valorem  duties. 
For  example,  under  the  tariff  law  of  19 14  there  is  a  duty  of 
30  per  cent  ad  valorem  and  a  specific  duty  of  five  cents  a 
pound  on  dyes. 

Excise  Taxes. — ^Taxes  levied  upon  articles  produced 
within  the  country  are  excise  taxes.  The  first  excise  tax 
was  levied  in  1791  upon  distilled  spirits  as  a  part  of  the 


332  THE   ELEMENTS   OF   ECONOMICS 

plan  of  Congress  for  paying  the  national  debt.  The  tax 
was  unpopular  and  was  soon  repealed.  The  War  of  1812 
caused  excise  taxes  to  be  levied  upon  sugar  and  distilled 
spirits,  but  these  taxes  were  repealed  in  181 7.  The  Civil 
War  caused  excise  taxes  to  be  revived  on  an  enormous 
scale.  The  words  of  Sydney  Smith,  employed  forty  years 
before,  have  been  aptly  applied  to  the  excise  taxes  of  the 
Civil  War  period. 

''Taxes  upon  every  article  which  enters  into  the  mouth, 
or  covers  the  back,  or  is  placed  under  the  foot;  taxes  upon 
everything  that  is  pleasant  to  see,  hear,  feel,  smell,  or  taste; 
taxes  upon  warmth,  light,  and  locomotion;  taxes  on  every- 
thing on  earth,  and  the  waters  under  the  earth;  on  every- 
thing that  comes  from  abroad,  or  is  grown  at  home;  taxes 
on  raw  material;  taxes  on  every  fresh  value  that  is  added 
to  it  by  the  industry  of  man;  taxes  on  the  sauce  which 
pampers  man's  appetite,  and  the  drug,  which  restores  him 
to  health;  on  the  ermine  which  decorates  the  judge,  and 
the  rope  which  hangs  the  criminal;  on  the  poor  man's  salt 
and  the  rich  man's  spice;  on  the  brass  nails  of  the  coffin 
and  the  ribands  of  the  bride." 

Most  of  the  excise  taxes  were  abolished  after  the  war, 
but  the  taxes  on  liquors  and  tobacco  were  retained  and 
became  an  important  item  of  Federal  income.  The 
Spanish-American  War  resulted  in  new  excise  taxes,  which 
were  abandoned  soon  after  the  war  ended;  and  again  at 
the  entrance  of  the  United  States  into  the  World  War, 
excise  taxation  was  revived  on  a  large  scale. 

Income  Taxes. — The  first  experience  of  the  United  States 
with  income  taxes  came  during  the  Civil  War.  The  In- 
come Tax  of  1862  exempted  incomes  below  $600  and  taxed 


PUBLIC   FINANCE  333 

those  in  excess  of  $600  at  3  per  cent.  Incomes  exceeding 
$io,ocx)  were  taxable  at  5  per  cent.  In  1864  the  income 
tax  law  was  revised  and  the  new  rates  were  5  per  cent  on 
incomes  between  $600  and  $5,000,  with  7>^  per  cent  on 
the  excess  of  $5,000  up  to  $10,000,  and  10  per  cent  on  the 
excess  over  $10,000.  The  tax  yielded  $72,982,000  in  1866, 
but  after  that  time  a  change  in  the  law  exempted  incomes 
of  less  than  $2,000  and  lowered  the  rate.  The  tax  was 
abolished  in  1872.  The  necessity  of  providing  additional 
revenue  caused  Congress  to  institute  another  income  tax 
in  1894.  Before  the  tax  was  collected  the  act  creating  it 
was  declared  unconstitutional  by  the  Supreme  Court.  An 
income  tax  is  regarded  by  most  economists  as  the  fairest 
of  all  taxes,  because  the  amount  of  'a  man's  income  is  the 
best  indication  of  his  ability  to  contribute  to  the  expenses 
of  the  government. 

The  Constitution  of  the  United  States  required  that  all 
direct  taxes  be  apportioned  among  the  states  in  proportion 
to  their  population.  Since  the  abihty  to  pay  income  taxes 
is  not  in  proportion  to  the  population  of  the  states,  no  in- 
come tax  could  be  passed  by  Congress  which  would  be  fair. 
Therefore  the  Constitution  must  be  amended  if  the  United 
States  were  to  use  this  best  source  of  revenue.  After  long 
consideration  Congress  submitted  an  amendment  providing 
that  ''Congress  shall  have  power  to  lay  and  collect  taxes 
on  incomes,  from  whatever  sources  derived  without  appor- 
tionment among  the  several  states,  and  without  regard  to 
any  census  or  enumeration."  This  amendment  was  duly 
ratified  and  was  proclaimed  a  part  of  the  Constitution  on 
February  25,  19 13.  It  was  fortunate  for  the  country  that 
the  income  tax  was  in  operation  before  the  United  States 


334  THE   ELEMENTS   OF   ECONOMICS 

entered  the  World  War,  as  it  became  the  chief  source  of 
income  from  taxation  during  the  war. 

The  Revenue  Act  of  1918  exempts  from  the  income  tax 
unmarried  persons  with  an  income  of  $1,000  or  less,  and 
married  persons,  living  with  husbands  or  wives,  having  an 
income  of  $2,000  or  less.  There  is  an  additional  exemption 
of  $200  for  each  child  under  eighteen  years  of  age  and  an 
equal  exemption  for  each  dependent  of  over  eighteen  years 
of  age,  who  is  mentally  or  physically  incapable  of  earning  a 
living.  The  normal  tax  is  4  per  cent  on  net  incomes  of 
$4,000  or  less  and  8  per  cent  on  incomes  in  excess  of 
$4,000.  In  addition  to  the  normal  tax  there  are  surtaxes,, 
the  first  surtax  being  i  per  cent  on  the  amount  by  which 
the  net  income  exceeds  $5,000  and  does  not  exceed  $6,000. 
The  surtax  increases  with  the  amount  of  income  and 
reaches  64  per  cent  on  all  incomes  between  $500,000  and 
$1,000,000.  Beyond  $1,000,000  income  the  surtax  is  65 
per  cent.  Practically  the  same  taxation  applies  to  in- 
comes of  corporations  as  to  individuals. 

Inheritance  Taxes. — Since  1916  the  United  States  has 
had  an  inheritance  tax.  It  is  imposed  on  the  estate  as  a 
whole,  not  on  the  shares  of  the  heirs,  irrespective  of  the 
relationship  of  the  beneficiaries  to  the  decedent.  Amounts 
of  less  than  $50,000  are  exempt  from  the  tax.  Estates 
between  $50,000  and  $150,000  are  taxed  at  i  per  cent  and 
the  rate  increases  until  it  reaches  25  per  cent  on  estates 
exceeding  $10,000,000.  Most  of  the  states  have  inheri- 
tance taxes  also,  with  exemptions  much  less  than  those 
allowed  by  the  United  States. 

Taxes  on  Real  Estate.— Taxes  on  land  and  buildings 
are  employed  by  state  and  local  governments,  but  not  by 


PUBLIC  FINANCE  335 

the  Federal  Government.  Real  estate  has  always  been  a 
favorite  subject  for  taxation,  as  it  cannot  be  concealed.  A 
difficulty  arises  because  of  the  fact  that  the  same  assess- 
ment is  used  as  the  basis  for  both  state  and  local  taxation. 
Each  local  assessor  endeavors  to  keep  down  the  valuation 
of  property  in  his  district  in  order  that  it  may  pay  a  small 
state  tax.  It  makes  no  difference  in  regard  to  the  amount 
of  the  local  tax  whether  the  property  is  assessed  at  its  full 
value  or  at  half  its  value,  as  the  rate  is  increased  as  the 
valuation  drops,  but  it  does  make  much  difference  in  the 
amoimt  paid  in  the  state  tax.  Local  assessors  of  one 
district  compete  with  those  of  other  districts  in  reducing 
valuations.  To  remedy  inequaHties  between  districts 
many  states  have  state  boards  of  equalization,  but  the 
task  is  beyond  the  ability  of  any  board.  A  man  who 
knows  the  value  of  real  estate  in  a  city,  seldom  knows  the 
value  of  farm  land  or  of  land  in  a  city  or  town  in  a  distant 
part  of  the  state.  Economists  generally  agree  that  real 
estate  should  be  taxed  only  for  local  purposes. 

Taxes  on  Personal  Property. — Personal  property  con- 
sists of  a  variety  of  movable  goods,  such  as  clothing,  jew- 
elry, books,  household  furniture,  money,  stocks,  bonds,  and 
mortgages.  Most  personal  property  is  easily  concealed 
and  much  of  it  cannot  be  valued  correctly  by  tax  assessors. 
In  many  of  the  states  personal  property  is  valued  by  its 
owners  for  taxation  purposes  and  they  are  obliged  to  swe^r 
to  the  correctness  of  their  valuations.  The  dishonest  can 
easily  escape  a  general  tax  on  personal  property.  Such  a 
tax  is,  therefore,  often  called  a  tax  on  honesty.  It  is  evi-  % 
dent  that  states  which  still  retain  the  general  tax  on  per- 
sonal property  should  abolish  it  retaining  only  a  tax  upon 


336  THE   ELEMENTS   OF  ECONOMICS 

such  personal  property  as  cannot  be  concealed  and  can  be 
valued  fairly  well  by  tax  assessors. 

A  Program  of  Taxation. — The  needs  of  the  Federal 
Government,  as  soon  as  conditions  become  normal,  may  be 
met  by  the  proceeds  of  the  customs  duties,  excise  taxes, 
an  inheritance  tax,  and  an  income  tax. 

The  National  Tax  Association,  at  its  convention  at 
Chicago  in  191 9,  presented  A  Model  System  of  State  and 
Local  Taxation.  With  the  exception  of  an  income  tax 
which  is  reconamended  for  states,  though  also  used  by 
the  United  States,  there  is  no  overlapping  with  Federal 
taxation.  Doctor  Carl  C.  Plehn,  in  his  Introduction  to 
Public  Finance,  gives  a  summary  of  the  recommendations, 
as  follows: 

"i.  A  personal  income  tax.  ' Every  person  having  tax- 
able ability  should  pay  a  direct  tax  to  the  government 
under  which  he  is  domiciled.'  'The  tax  should  be  levied 
upon  persons  in  respect  of  their  entire  net  incomes,  and 
should  be  collected  only  from  persons  and  at  places  where 
they  are  domiciled.  It  should  not  be  collected  from  busi- 
ness concerns,  either  incorporated  or  unincorporated,  since 
such  action  would  defeat  the  very  purpose  of  the  tax.* 
Non-residents  earning  income  in  or  receiving  income  from 
sources  in  a  State  should  not  be  taxed. 

''  ^  2.  There  should  be  a  tax  upon  tangible  property 
levied  exclusively  at  the  place  where  such  property  is 
located'  and  'intangible  property  of  all  descriptions  be  ex- 
empt from  taxation  as  property.'  The  tax-paying  ability 
of  such  property  can  be  reached  in  other  ways. 

^'3.  That  the  methods  of  taxation  applied  to  public 
service  corporations  be  improved  so  as  to  impose  an  equi- 


PUBLIC   FINANCE  337 

table  burden  upon  such  companies,  but  no  one  method  was 
recommended. 

"4.  A  business  tax  'levied .upon  the  net  income  derived 
from  business  carried  on  within  the  State  levying  the  tax.' 

''5.  Improved  administration  involving  (a)  assessment 
districts  large  enough  to  justify  the  employment  of  a  per- 
manent full  time  official;  (b)  a  term  of  office  long  enough 
to  develop  efficiency,  at  least  four  years;  (c)  power  of  re- 
mctval  of  assessors  by  the  State  tax  commission;  (d)  sl  per- 
hianent  central  State  tax  commission,  with  broad  powers 
over  the  entire  tax  system,  State  and  local." 

Exemptions  from  Taxation. — Churches,  charitable  in- 
stitutions, schools  and  colleges  not  operated  for  private 
gain,  literary  societies,  volunteer  fire  departments  and 
other  associations  which  are  operated  for  the  public  wel- 
fare, are  exempt  from  taxation.  Incomes  below  a  fixed 
minimum,  property  of  less  than  a  few  hundred  dollars,  and 
tools  of  mechanics  are  exempted  from  taxation  in  many 
states.  These  exemptions  are  reasonable  and  have  aroused 
little  opposition.  The  exemption  of  public  property  and 
bonds  of  national,  state,  and  local  units  is  also  reasonable. 
At  the  present  time  salaries  paid  by  the  states  and  local 
governments  are  exempt  from  the  Federal  income  tax.  It 
does  not  seem  equitable  that  a  public  school-teacher  should 
pay  no  income  tax,  while  a  teacher  in  a  private  school  or 
college  should  be  taxed,  but  Federal  taxation  of  state 
employees  is  regarded  as  unconstitutional.  Bonds  of  pub- 
lic-service corporations  are  sometimes  exempt  from  state 
taxes.  Exemption  of  any  person  or  of  property  from  tax- 
ation means  that  other  persons  must  pay  larger  taxes. 
Exemptions  should  be  allowed  only  when  the  public  wel- 


SsS  THE   ELEMENTS   OF   ECONOMICS 

fare  demands  them.     It  is  the  privilege  and  duty  of  citizens 
to  contribute  to  the  public  financial  needs. 

Taxes  on  Sales. — ^A  tax  on  sales  has  been  proposed  as  a 
substitute  for  the  excess-profits  tax,  the  tax  on  amusements, 
and  on  so-called  luxuries.  The  plan  is  to  place  a  tax  of 
I  per  cent  upon  all  taxable  sales  above  a  total  of  $6,cxx) 
made  by  any  dealer.  This  tax  would,  of  course,  be  shifted 
to  the  consumer,  and  if  the  article  changed  hands  several 
times  before  reaching  the  final  consumer,  it  would  increase 
with  every  exchange.  In  the  great  majority  of  cases  the 
increase  probably  would  not  be  over  3  per  cent.  The 
arguments  in  favor  of  a  tax  on  sales  are: 

1.  It  would  produce  a  large  revenue — at  least  $2,000,- 
000,000  a  year. 

2.  It  would  be  paid  by  the  whole  body  of  the  people, 
but  in  small  amounts  by  each  individual. 

3.  It  would  be  simple  in  operation,  would  yield  a 
steady  flow  of  income,  and  could  be  collected  without 
much  expense. 

4.  It  is  claimed  that  it  would  reduce  the  cost  of  living. 
The  excess-profits  tax  is  now  shifted  on  the  consumer  and 
this  burden  is  probably  greater  than  would  be  the  burden 
of  a  sales  tax. 

The  chief  objection  to  a  sales  tax  is  that  it  violates  the 
canon  of  taxation  of  Adam  Smith  that  says  "a  tax  ought 
to  bear  upon  people  in  proportion  to  their  ability  to  pay." 
The  poor  would  pay  more  in  proportion  to  their  ability 
than  the  rich.  This  objection  would  not  hold,  however,  in 
case  the  income  tax  were  retained,  with  its  exemption  of 
incomes  below  $1,000  for  unmarried  persons  and  $2,000  for 
married  persons.     A  i-per-cent  tax  on  sales  was  imposed 


Reproduced  by  permission  of  J.  N.  Darling  and  N.  Y.  Tribune,  Inc.     Copyright  192 1. 

IT'S  JUST  AS  WELL  TO  REMEMBER  WHOM  WE'RE  GETTING 
DINNER  FOR 

Payment  for  past  wars  and  preparations  for  possible  wars  absorb  over  80  per 
cent  of  the  revenue  of  the  United  States.  The  financial  argument  for  disarma- 
ment by  the  great  nations  is  unanswerable. 


340  THE   ELEMENTS   OF  ECONOMICS 

in  the  Philippine  Islands  in  1905  and  it  is  reported  to  have 
given  general  satisfaction. 

Public  Debts. — The  ordinary  expenses  of  government 
should  be  paid  out  of  the  regular  revenues,  but  there  are 
times  when  public  borrowing  properly  may  be  employed. 
The  expenses  incident  to  the  building  of  a  great  public  im- 
provement, like  the  Catskill  Aqueduct,  or  the  Panama 
Canal,  may  be  met  out  of  the  proceeds  of  a  loan,  which  can 
be  repaid  through  annual  payments  into  a  sinking  fund 
which  will  equal  the  amount  borrowed  at  the  time  the 
bonds  become  due.  No  great  public  improvements  could 
be  made  if  all  of  the  payment  for  them  had  to  come  out  of 
taxes  raised  during  the  years  when  the  work  of  construc- 
tion was  being  done.  In  a  similar  way  the  borrowing  of 
money  to  finance  a  war  is  justified.  The  war,  like  a  great 
public  improvement,  may  be  for  the  welfare  of  future 
generations  and  part  of  the  burden  should  be  borne  by 
them. 

In  a  certain  sense  the  present  generation  must  pay  for 
all  its  expenses.  The  labor  of  building  the  Panama  Canal, 
the  stone,  cement,  and  tools  used  had  to  be  furnished  when 
the  canal  was  being  built,  and  so  the  labor,  the  munitions 
of  war,  the  clothing  and  food  of  the  soldiers  had  to  be 
supplied  by  the  people  living  when  the  war  was  being 
fought.  But  the  money  to  buy  supplies  and  pay  men 
can  be  borrowed  or  raised  by  taxation.  If  paid  entirely 
out  of  the  proceeds  of  taxation,  it  will  raise  taxation  to 
such  an  extent  as  to  discourage  industry  and  weaken  the 
''home  front."  If  a  part  of  the  expense  is  paid  by  bor- 
rowing, that  part  is  advanced  by  those  who  subscribe  to 
the  bonds  and  they  are  repaid  later  out  of  the  proceeds  of 


From  a  photograph  by  Brown  Brothers. 

SELLING  LIBERTY  BONDS  IN  NEW  YORK 

The  building  on  the  right  is  the  Sub-Treasury.  It  occupies  the  site  of  Federal 
Hall,  where  Washington  was  inaugurated  first  President  of  the  United  States, 
April  30,  1789.  The  statue  of  Washington  may  be  seen  in  front  of  the  Sub-Trea- 
sury. The  narrow  street  in  the  background  is  Wall  Street,  the  financial  centre  of 
America.  At  the  head  of  Wall  Street  is  Trinity  Church  on  Broadway,  facing  the 
entrance  to  Wall  Street. 


342  THE   ELEMENTS   OF   ECONOMICS 

taxation.  No  belligerent  in  the  World  War  could  have 
paid  its  expenses  out  of  the  proceeds  of  taxation  without 
arousing  serious  discontent. 

The  Liberty  and  Victory  Loans. — ^Approximately  one- 
third  of  the  expenses  of  the  United  States  during  the  war 
was  obtained  out  of  the  proceeds  of  taxation,  the  re- 
mainder was  raised  through  loans.  The  total  increase  in 
the  public  debt  of  the  United  States  during  the  war  was 
as  follows: 


First  Liberty  Loan $1,985,000,000 

Second  Liberty  Loan 3,526,000,000 

Third  Liberty  Loan 3,904,000,000 

FourtTi  Liberty  Loan 6,614,000,000 

Victory  Loan 4,414,000,000 

Treasury  Certificates 3,736,000,000 

War  Savings  Certificates 911,000,000 


At  the  time  the  war  began  the  total  debt  of  the  United 
States  was  only  $i,i2o,cxx),ooo.  The  Liberty  and  Victory 
loans  were  a  great  success,  notwithstanding  that  thousands 
bought  bonds  they  could  not  afford  to  hold  and  later  by 
throwing  them  upon  the  market  lowered  the  market  price 
of  bonds.  The  price  was  also  depressed  by  the  fact  that 
first-class  bonds  of  private  corporations  were  paying  a  much 
larger  rate  of  interest.  None  the  less,  thousands  of  people 
who  never  before  had  owned  a  bond,  purchased  bonds  of 
the  United  States  and  continue  to  hold  them.  They  not 
only  secured  the  best  bonds  in  the  world  and  learned  a 
lesson  in  saving,  but  their  bonds  will  become  more  valu- 
able as  time  passes.  No  one  who  buys  and  keeps  bonds 
of  the  United  States  will  ever  have  reason  to  regret  his 
investment. 


PUBLIC   FINANCE  343 

Summary. — Public  and  private  finance  differ  in  three 
important  particulars:  (i)  Public  revenue  is  designed  to 
equal  public  expenses;  (2)  a  surplus  is  not  desirable  for  a 
state;  (3)  public  finance  rests  upon  the  power  of  compul- 
sion. Public  expenses  are  growing.  Taxes  may  not  be 
expected  to  fall,  but  we  should  see  that  the  government 
gets  full  values  for  the  money  it  spends.  The  cost  of  war 
has  been  very  great.  This  can,  and  should,  be  lessened 
through  international  agreements. 

The  greatest  regular  source  of  public  revenue  is  taxa- 
tion. Adam  Smith's  four  canons  of  taxation  are  generally 
accepted  as  describing  rules  to  which  taxation  should  con- 
form. Direct  taxes  are  taxes  which  are  finally  paid  by 
the  person  upon  whom  they  are  originally  levied.  In- 
direct taxes  are  shifted.  Direct  taxation  is  superior  to 
indirect  taxation  in  most  respects,  but  indirect  taxation 
has  the  advantage  of  being  paid  in  small  instalments  by 
the  persons  upon  whom  the  burden  finally  falls.  Taxes 
on  imports  may  be  specific,  ad  valorem,  or  a  combination 
of  the  two.  Excise  taxes  are  taxes  laid  upon  articles  pro- 
duced within  the  country.  Taxes  on  incomes  have  become 
the  most  important  tax  in  the  United  States.  These  taxes 
are  the  fairest  of  all  taxes.  Inheritance  taxes  are  em- 
ployed by  both  state  and  national  governments.  The 
income  from  inheritance  tax  differs  from  year  to  year,  but 
the  average  for  a  term  of  years  remains  the  same.  Taxes 
on  real  estate  should  be  for  local  purposes.  The  personal- 
property  tax  should  be  abolished  because  it  cannot  be 
properly  collected. 

Exemptions  from  taxation  is  proper  when  the  public 
welfare  demands  it.     Public  debts  may  properly  be  con- 


344  THE   ELEMENTS   OF   ECONOMICS 

tracted    for    extraordinary    expenses.     Regular    expenses 
should  be  met  out  of  regular  sources  of  income. 

TOPICS  FOR  DISCUSSION,  DEBATE,  AND   SPECIAL  REPORTS 

1.  Get  a  copy  of  the  budget  of  your  city  for  the  last  year.     What 

are  the  principal  items  of  expense?  What  changes  would 
you  suggest? 

2.  Should  a  new  park  be  purchased  by  a  tax  on  the  entire  city? 

By  a  tax  on  adjoining  property?  By  a  combination  of  the 
above  ?     By  the  sale  of  city  bonds  ? 

3.  What  direct  taxes  do  you  pay?     What  indirect  taxes?     What 

direct  taxes  does  a  day-laborer  pay  ?     What  indirect  taxes  ? 

4.  Should  a  man  who  has  no  children  be  taxed  to  support  the 

public  schools?  Why?  Why  should  churches  be  exempt 
from  taxation?    What  schools  pay  taxes?    Why? 

5.  Why  are  Liberty  and  Victory  Bonds  the  best  securities  in  the 

world?  Why  did  some  of  them  fall  below  par?  Find  the 
present  price  of  each  issue  of  Liberty  and  Victory  Bonds  and 
explain  the  difference  in  their  market  values. 


CHAPTER  XXXII 
SOCIAL  AND  ECONOMIC  BETTERMENT 

The  word  ^'Utopia"  was  introduced  into  the  English 
language  in  1516,  when  Thomas  More  pubHshed  his  book 
bearing  that  title.  Utopia  means  the  land  of  nowhere.  It 
describes  an  ideal  commonwealth  very  different  from  the 
England  of  the  sixteenth  century.  England  seemed  to 
exist  only  for  the  benefit  of  the  rich  and  powerful.  Good 
food  and  decent  clothing  were  too  expensive  for  the  poor. 
Tillage  had  decreased  and  pastures  for  the  sheep  of  the 
rich  abbots  had  supplanted  arable  land.  Disabled  soldiers 
crippled  in  useless  wars  were  everywhere  to  be  seen.  The 
courts  of  the  rich  were  thronged  with  retainers  who  ren- 
dered no  useful  service,  but  gratified  their  lord's  love  of 
ostentation.  If  a  man  chose  to  steal  rather  than  starve, 
he  paid  the  penalty  with  his  life.  Frequently  a  score  of 
victims  might  be  seen  hanging  from  one  gallows. 

In  contrast  to  the  England  of  his  day  More  pictured  the 
land  of  nowhere,  a  country  where  everything  was  perfect. 
In  Utopia  the  people  elected  their  own  king  and  parlia- 
ment. The  Utopians  hated  war  and  never  engaged  in  a 
war  of  conquest.  Education  was  not  confined  to  one  class, 
but  every  one  was  taught  to  read  and  write.  In  Utopia 
every  family  had  a  vote  and  voting  was  by  ballot.  All 
property  belonged  to  the  nation. 

345 


346  THE   ELEMENTS   OF   ECONOMICS 

This  was  Sir  Thomas  More's  idea  of  a  perfect  common- 
wealth and  it  seemed  unattainable  in  any  particular.  Yet 
we  have  arrived  at  Utopia  with  the  exception  of  com- 
munism.    The  dream  has  come  true. 

Recent  Social  and  Economic  Progress 

Most  of  the  progress  since  the  days  of  Sir  Thomas  has 
been  made  in  the  last  one  hundred  and  twenty-five  years. 
In  England  one  hundred  years  ago,  the  hours  of  labor 
were  from  twelve  to  sixteen  a  day.  Wages  were  so  low 
that  every  member  of  a  family  had  to  work  and  the  com- 
bined wages  were  scarcely  enough  to  afford  a  decent  liv- 
ing. Women  were  employed  in  the  mines,  frequently  har- 
nessed to  coal  carts  like  beasts  of  burden.  These  carts 
were  dragged  through  low  and  narrow  passages,  where  the 
women  had  to  stoop  and  crawl  on  their  knees.  Child  labor 
was  the  rule.  Pauper  children  were  apprenticed  to  masters, 
who  put  them  to  work  in  factories.  If  a  child  attempted 
to  escape  he  was  chained  to  the  machifie  which  he  oper- 
ated. Labor  organizations  were  illegal  and  the  working 
men  had  no  votes.  The  criminal  law  showed  the  cruelty 
of  the  time.  Two  hundred  and  fifty  crimes  were  punish- 
able by  death.  Even  the  stealing  of  goods  to  the  value 
of  five  shillings  was  a  capital  offense.  There  was  no  popu- 
lar education. 

In  America  conditions  were  better,  but  hours  of  labor 
were  long  and  slavery  degraded  labor.  Had  any  one  in  the 
days  of  George  Washington  attempted  to  predict  economic 
and  social  conditions  as  they  exist  in  the  twentieth  century 
he  would  have  been  thought  a  dreamer. 

Were  men  content  with  the  standard  of  living  which 


SOCIAL   AND   ECONOMIC   BETTERMENT  347 

prevailed  a  hundred  years  ago,  a  few  hours'  labor  each  day- 
would  produce  all  the  goods  needed.  The  rich  had  many 
servants  and  many  costly  ornaments,  but  they  lacked  the 
comforts  of  a  modern  working  man.  Joseph  Priestley 
wrote  that  his  mother,  some  time  in  the  year  1 740,  required 
him  to  return  a  pin  which  he  found  at  his  uncle's  house. 
She  did  this  to  give  him  "a  clear  idea  of  the  distinction  of 
property."  Pins  were  not  so  abundant  that  one  was  re- 
garded with  indifference.  Even  so  late  as  1840  thorns 
were  sometimes  used  for  pins  in  parts  of  the  United  States. 

Methods  of  Economic  Progress 

There  is  no  reason  to  doubt  that  economic  progress  will 
be  as  great  in  the  future  as  it  has  been  in  the  past.  A 
larger  production  of  wealth  will  give  more  comforts  to  the 
people  and  more  time  for  education  and  recreation.  A 
larger  production  of  wealth  may  be  secured: 

1.  By  increasing  the  supply  of  available  land.  Drain- 
age of  swamps,  irrigation  of  arid  lands,  and  opening  means 
of  communication  with  lands  now  unavailable  because  of 
distance  are  among  the  means  of  increasing  available  land. 
Much  of  the  land  of  North  America  is  now  unavailable 
and  much  more  than  half  of  the  land  of  South  America  is 
at  present  unavailable. 

2.  By  utilizing  more  fully  the  forces  of  nature.  The 
power  of  the  winds,  the  water-power  afforded  by  rivers, 
the  force  of  the  tides  are  as  yet  almost  neglected. 

3.  By  increasing  capital.  This  may  be  done  by  en- 
couraging savings,  by  economy  in  the  use  of  materials,  by 
new  inventions,  and  by  making  investments  safe  and  there- 
fore more  attractive. 


348  THE   ELEMENTS   OF   ECONOMICS 

4.  By  education  in  the  arts  and  sciences ,  thus  increas- 
ing the  efficiency  of  both  labor  and  capital. 

5.  By  teaching  the  dignity  of  labor  and  the  vice  of  idleness. 

Increased  Production  should  Benefit  All 

Every  useful  member  of  society  should  share  in  the 
benefits  of  an  increased  production  of  wealth.  A  high 
standard  of  life  for  laborers  and  all  others  should  be  en- 
couraged. Immigration  of  undesirable  people  of  what- 
ever race  should  be  prevented.  Building  and  Loan  Asso- 
ciations and  other  agencies  to  assist  people  to  own  their 
own  homes  should  be  encouraged.  The  housing  question 
will  never  be  completely  settled  until  every  family  owns 
its  own  home.  If  there  is  no  room  in  the  city,  railroads 
and  subways  may  be  constructed  to  take  the  people  to  the 
country,  or  the  factories  may  move  to  the  country. 

Public  art-galleries,  museums,  libraries,  parks,  and  rec- 
reation centres  will  give  to  all  increased  possibilities  of 
education  and  amusement. 

Insurance  can  be  made  available  to  protect  the  people 
against  the  certainties  of  death  and  old  age,  and  against 
the  uncertainties  of  accident,  disease,  and  unemployment. 

Education  can  be  extended  so  that  all  who  wish  and  can 
profit  by  it  may  have  the  advantages  of  higher  education. 

Though  great  progress  has  been  made  in  the  past,  it  is 
nothing  as  compared  to  what  the  future  has  in  store. 

Sir  Thomas  More  would  be  amazed  if  he  could  see  the 
United  States  in  the  twentieth  century.  Perhaps  our 
amazement  would  be  as  great  could  we  see  the  United 
States  in  the  twenty-first  century. 


APPENDICES 


APPENDIX  I 

INDUSTRIAL    REPRESENTATION    PLAN    OF    THE    FAC- 
TORY OF   THE   GOODYEAR   TIRE   AND    RUBBER 
COMPANY,  AKRON,  OHIO  * 

The  Council  of  Industrial  Relations,  composed  of  representa- 
tives elected  by  Goodyear  men  and  women,  foremen  elected  by 
Goodyear  foremen,  and  executives  appointed  by  the  Goodyear 
Factory  management,  after  having  thoroughly  considered  the  sub- 
ject of  industrial  representation  for  securing  justice  to  both  men 
and  management  through  co-operative  methods,  has  evolved  the 
following  plan  for  industrial  co-operation  at  Goodyear,  and  presents 
this  plan  to  Goodyearites  in  the  sincere  belief  that  its  acceptance 
by  management  and  men  of  the  Goodyear  Factory  will  prove  bene- 
ficial to  all. 

I.    Executive  Powers 
iVll  executive  powers  for  operation  of  the  Goodyear  Factory  shall 
be  vested  in  the  management,  and  shall  not  be  abridged  in  any 
way  except  in  accordance  with  the  legislative  powers  granted  in 
this  Industrial  Representation  Plan. 

2.    Legislative  Powers 
All  legislative  powers  granted  in  this  Industrial  Representation 
Plan  shall  be  vested  in  an  Industrial  Assembly  of  the  Goodyear 
Factory  which  shall  consist  of  two  (2)  houses,  namely,  a  Senate 
and  a  House  of  Representatives. 

3.    The  Industrial  Assembly 
The  Industrial  Assembly  shall  be  composed  of  forty  (40)  Repre- 
sentatives and  twenty  (20)  Senators,  elected  by  the  Industrians  of 
the  Goodyear  Factory,  who  shall  meet  separately  or  jointly,  on 

*  From  The  Industrial  Republic,  by  Paul  W.  Litchfield.  Printed  by  per- 
mission of  Houghton  MiflBin  Company,  owners  of  the  copyright. 

351 


352  APPENDIX   I 

the  first  Monday  in  each  month  in  Goodyear  Hall.  Representa- 
tives shall  be  elected  for  one  year,  and  Senators  shall  be  elected  for 
two  years. 

Each  Representative  and  each  Senator  shall  have  one  vote. 

Each  House  shall  vote  independently  of  the  other. 

Each  House  shall  determine  rules  for  its  proceedings  and  shall 
keep  a  record  of  its  proceedings. 

4.     Unit  of  Representation — Precinct  and  District 
The  Goodyear  Factory  shall  be  divided  into  forty  (40)  precincts. 

Precincts  shall  be  determined  so  as  to  include  substantially  an 

equal  number  of  people,  and  with  due  regard  to  departmental 

classification  of  the  factory. 

Each  precinct  shall  have  the  right  to  elect  one  Representative. 
The  precincts  shall  be  further  arranged  into  groups  of  four,  and 

each  group  shall  have  the  right  to  elect  two  Senators. 

5.    Method  of  Election  and  Recall  of  Senators 
AND  Representatives 

Election  of  Senators  and  Representatives  shall  be  held  in  the 
Goodyear  Factory  annually  on  the  second  Monday  in  October  by 
secret  ballot,  and  the  Assembly  shall  be  convened  on  the  first 
Monday  in  November.  At  each  annual  election  there  shall  be 
forty  Representatives  and  ten  Senators  elected,  except  in  the  first 
election,  when  there  shall  be  twenty  Senators  elected. 

A  Representative  or  Senator  may  be  recalled  on  petition  signed 
by  two- thirds  of  the  voters  in  his  precinct  or  district,  and  approved 
by  two-thirds  of  the  House  of  which  he  is  a  member. 

Upon  severance  of  employment  with  the  Company,  a  Represen- 
tative or  Senator  shall  immediately  and  automatically  cease  to  hold 
office. 

6.    Qualifications  of  Representatives  and  Senators 

No  person  shall  be  a  Representative  who  shall  not  have  attained 
to  the  age  of  twenty-one  years  and  who  shall  not  be  an  Industrian 
of  Goodyear,  and  not  have  had  one  year's  continuous  service  in  the 
factory  immediately  prior  to  date  of  election. 

No  person  shall  be  a  Senator  who  shall  not  have  attained  to  the 
age  of  twenty-five  years,  and  who  shall  not  be  an  Industrian  of 
Goodyear,  and  not  have  been  in  good  standing  on  the  pay-roll  of 


APPENDIX   I  353 

The  Goodyear  Tire  &  Rubber  Company  for  five  years,  the  last  two 
of  which  shall  have  been  a  continuous  service  immediately  prior  to 
election. 

If  vacancies  in  the  seats  of  Representatives  or  Senators  happen 
by  resignation  or  otherwise,  the  one  who  shall  have  received  the 
next  highest  number  of  votes  from  the  precinct  or  district  in  which 
the  vacancy  shall  have  occurred  shall  fill  the  vacancy. 

7.    Qualifications  of  Voters  and  Definition  of  Industrian 

A  Goodyear  Industrian  must  be  eighteen  years  of  age,  must  be  an 
American  citizen,  understand  the  English  language,  and  have  a  six 
months'  continuous  service  record  in  the  Goodyear  Factory  imme- 
diately prior  to  election.  Each  Goodyear  Industrian  is  entitled  to 
vote. 

8.     Power  and  Procedure  of  the  Industrial  Assembly 

The  Articles  of  Incorporation  of  The  Goodyear  Tire  &  Rubber 
Company  and  the  laws  of  the  State  of  Ohio  fix  the  final  authority 
and  responsibility  for  management  of  the  company  in  its  Board  of 
Directors.  Therefore,  subject  only  to  the  right  of  the  Board  of 
Directors  to  veto  or  annul,  the  power  of  the  Industrial  Assembly 
shall  have  legislative  power  to  make  changes  in  Factory  Rules  and 
Regulations  which  from  time  to  time  have  been  or  shall  be  made 
by  the  management  as  provided  in  Article  i ,  on  the  subject  of  wag 
adjustments,  working  conditions,  and  the  adjustment  of  grievances* 
in  accordance  with  the  following  procedure: 

Every  bill  which  shall  have  passed  the  House  of  Representatives 
and  the  Senate,  shall,  before  it  becomes  a  Factory  Rule  or  Regula- 
tion, be  presented  to  the  Goodyear  Factory  Manager.  If  he 
approves,  he  shall  sign  it,  but  if  not,  he  shall  return  it  with  his 
objections  to  the  House  in  which  it  shall  have  originated,  who  shall 
enter  the  objections  at  large  upon  their  record,  and  proceed  to 
reconsider  it.  If  after  such  reconsideration,  two-thirds  of  that 
House  shall  agree  to  pass  the  bill  it  shall  be  sent,  together  with 
the  objections,  to  the  other  House,  by  which  it  shall  likewise  be 
reconsidered,  and  if  approved  by  two-thirds  of  that  House  it  shall 
become  a  Factory  Rule  or  Regulation.  But  in  all  such  cases  the 
votes  of  both  Houses  shall  be  determined  by  yeas  and  nays,  and 
the  names  of  the  persons  voting  for  and  against  the  bill  shall  be 
entered  on  the  record  of  each  House  respectively.  If  any  bill  shall 
not  be  returned  by  the  Factory  Manager  within  thirty  days  (Sun- 


354  APPENDIX   I 

days  excepted)  after  it  shall  have  been  presented  to  him,  the  same 
shall  be  a  Factory  Rule  or  Regulation  in  like  manner  as  if  he  had 
signed  it,  unless  the  Assembly  by  failure  to  provide  proper  means 
to  receive  it  shall  prevent  its  return,  in  which  case  it  shall  not  be  a 
Factory  Rule  or  Regulation. 

9.  Approval  and  Veto  Powers  of  the  Factory  Manager 
Every  order,  resolution,  or  vote,  to  which  the  concurrence  of 
the  Senate  and  House  of  Representatives  may  be  necessary  (except 
on  a  question  of  adjournment),  shall  be  presented  to  the  Factory 
Manager  of  the  Goodyear  Company,  and  before  the  same  shall  take 
effect  shall  be  approved  by  him,  or  being  disapproved  by  him,  shall 
be  repassed  by  two-thirds  of  the  Senate  and  House  of  Representa- 
tives according  to  the  rules  and  limitations  in  the  case  of  a  bill. 

10.  Joint  Conferences 
On  matters  of  joint  interest  to  men  and  management,  such  as 
wage  adjustments,  working  conditions,  and,  the  adjustment  of 
grievances,  joint  conferences  may  be  called  where  representatives 
of  the  men  meet  an  equal  number  of  representatives  of  the  manage- 
ment. Frequent  conferences  are  desirable  for  the  consideration  of 
constructive  suggestions  of  mutual  interest. 

II.  Joint  Conferences — How  Formed 
The  Industrial  Assembly  shall  appoint  six  (6)  Industrians,  three 
from  the  Senate  and  three  from  the  House  of  Representatives,  and 
the  Factory  Management  shall  appoint  six  (6)  Industrians  to  meet 
as  a  joint  conference.  Persons  thus  selected  shall  be  duly  accred- 
ited representatives  of  the  Goodyear  Factory  men  and  manage- 
ment for  consideration  of  and  co-operation  upon  subjects  of  mutual 
interest.  The  Industrial  Assembly  shall  maintain  standing  com- 
mittees composed  of  three  members  of  each  House  to  facilitate 
quick  action  in  securing  a  joint  conference. 

12.  Industrial  Representation  Plan — How  Amended 
The  Industrial  Assembly,  whenever  two-thirds  of  both  Houses 
shall  deem  it  necessary,  shall  propose  amendments  to  this  Indus- 
trial Representation  Plan,  which  shall  be  valid  to  all  intents  and 
purposes  as  a  part  of  this  plan  when  approved  by  the  Factory 
Manager.     In  case  amendments  have  been  passed  by  a  two-thirds 


APPENDIX   I  355 

vote  of  both  Houses  over  the  veto  of  the  Factory  Manager,  such 
amendments  must  be  approved  by  the  Board  of  Directors  of  The 
Goodyear  Tire  &  Rubber  Company  before  becoming  valid. 

13.  Oath  of  Office 
Before  entering  upon  his  duties,  each  Representative  or  Senator 
shall  take  and  subscribe  to  the  following  oath  which  shall  be  ad- 
ministered by  any  officer  empowered  to  administer  oaths  under 
the  laws  of  Ohio:  "I  solemnly  swear  (or  affirm)  that  I  will  faith- 
fully support  the  Constitution  and  laws  of  the  United  States  and 
the  State  of  Ohio  and  the  Industrial  Representation  Plan  of  the 
Goodyear  Factory,  and  that  I  will  to  the  best  of  my  ability  faith- 
fully and  conscientiously  discharge  the  duties  incumbent  on  me  as 
a  Representative  (or  Senator)  under  such  plan." 

14.     Guarantee  Against  Discrimination 
There  shall  be  no  discrimination  against  any  Goodyearite  on 
account  of  membership  or  non-membership  in  any  labor  organiza- 
tion or  against  any  Representative  or  Senator  for  action  taken  by 
him  in  performance  of  his  duties  as  outlined  in  this  Plan. 

15.  Industrial  Representation  Plan — How  Ratified 
This  Industrial  Representation  Plan  shall  become  effective  when 
a  majority  of  the  Industrians  of  the  Goodyear  Factory  and  the 
management  of  the  Goodyear  Factory  shall  have  authorized  the 
present  Industrial  Relations  Council  to  place  their  signatures 
hereon . 


APPENDIX  II 

Extracts  from  advance  copy  of  bulletin  prepared  by  Mr.  Don  D. 
Lescohier,  Associate  Professor  of  Economics,  in  charge  of  Ameri- 
canization work  for  the  University  of  Wisconsin.  Published  by 
the  Extension  Division  of  the  University  of  Wisconsin. 

AMERICANIZATION— WHAT  IS  IT?* 

Americanization  in  the  United  States,  and  Canadianization  in 
Canada,  differ  fundamentally  in  their  spirit,  method,  and  purpose 
from  the  efforts  of  Germany  to  Germanize  Poland,  Schleswig- 
Holstein,  and  Alsace-Lorraine;  of  Austria  to  Austrianize  the  Czechs 
and  Croats;  and  of  Turkey  to  suppress  the  nationalism  of  the  Ar- 
menians. The  Central  Powers  tried  to  crush  the  national  cultures 
and  customs  of  peoples  over  whom  they  had  acquired  power  by 
force  of  arms.  They  continually  subjected  them  to  the  efforts  of 
conquerors  who  sought  to  suppress  the  language  and  traditions  that 
had  obtained  in  the  acquired  territories,  and  to  compel  the  use  of 
the  language,  government,  and  culture  of  the  conqueror. 

Americanization  has  nothing  in  common '  with  such  efforts  as 
these.  It  is  an  effort  to  assist  the  alien  among  us  to  understand, 
appreciate,  and  partake  of  the  best  in  American  life  and  thought. 
It  is  an  effort  to  provide  facilities  that  will  enable  him  to  become 
an  integral  part  of  America  and  its  life.  It  is  a  movement  to  help 
him  share  the  privileges  and  benefits  that  a  democracy  offers  to  its 
people,  and  to  fit  him  for  its  responsibilities  as  a  citizen  in  a  demo- 
cratic commonwealth.  It  aims  to  help  him  know  our  national  life; 
to  help  him  make  our  traditions,  heroes,  and  ideals  his;  to  inspire 
in  him  a  love  for  America  and  what  it  stands  for;  to  win  his  heart 
to  the  things  we  love. 

But  Americanization  is  more  than  this.  It  is  as  necessary  for 
Americans  to  understand  the  peoples  who  have  come  to  them  from 
foreign  lands  as  for  those  peoples  to  become  acquainted  with 
America.     Every   people   whose   feet   have   pressed   our   soil    has 

*  Printed  by  permission  of  the  author. 
356 


APPENDIX   II  357 

brought  to  us  traditions,  customs,  capacities,  ideals,  and  personal 
qualities  which  are  of  inestimable  value  to  America.  Each  race 
or  nationality,  when  it  first  came  to  our  shores,  had  to  start  at  the 
bottom  of  the  economic  ladder.  Each  one's  capacity  was  under- 
valued by  the  American  during  the  early  years  of  its  migration  to 
America,  because  it  had  to  rely  principally  upon  common  labor  for 
a  livelihood  while  it  was  learning  our  language  and  customs  and 
fitting  itself  into  our  national  life.  The  indifference  and  hardly  dis- 
guised contempt  which  a  large  number  of  Americans  felt  toward  the 
Italian  or  the  Slav  during  the  twenty-five  years  from  1890  to  the 
outbreak  of  the  war,  was  experienced  in  earlier  years  by  the  Irish- 
man and,  in  many  parts  of  the  country,  by  the  German,  Scandi- 
navian, and  Belgian.  It  is  as  necessary  to  help  the  American 
understand  the  newcomer  and  appreciate  the  contribution  which 
he  will  make  to  our  national  life,  as  to  help  the  immigrant  under- 
stand the  American. 

There  is  another  point  which  Americans  must  be  taught  to 
remember.  Every  alien  who  comes  to  America  comes  here  because 
he  believes  that  America  is  a  better  place  to  live  than  his  homeland. 
He  comes  here  hopefully,  expectantly,  eagerly.  He  comes  here  in 
a  receptive  mood.  The  only  reason  that  alien  propaganda  has  been 
able  to  retain  a  hold  on  part  of  the  immigrants,  has  been  that  we 
have  failed  to  provide  them  with  proper  educational,  industrial, 
and  social  opportunities  to  become  a  real  part  of  our  life.  They 
have  not  found  us  responsive,  and  their  enthusiasm  has  been  chilled. 
They  have  concluded  that  we  did  not  care  about  them.  Ameri- 
canization must  teach  the  American  to  value  the  people  who  have 
come  to  us,  and  cause  him  to  assist  the  alien  to  enter  into  the 
privileges  and  duties  of  America's  adopted  sons. 

Americanization  is,  then,  a  process  of  education,  of  mutual  under- 
standing, of  growing  together.  It  cannot  be  accomplished  by  any 
one  agency.  The  public  schools  can  reach  some  of  the  adults; 
the  Y.  M.  and  Y.  W.  C.  A.,  the  social  settlements,  the  welfare  work 
of  employers  have  important  parts  to  play;  while  the  university's 
research  work  and  training  of  leaders  is  necessary  to  provide 
specialized  knowledge  and  leadership.  Improvements  in  labor 
conditions,  in  land  laws,  in  the  housing  of  the  poor,  and  in  methods 
of  labor  distribution  are  as  important  as  any  of  the  educational 
work.  They  will  remove  many  of  the  immigrant's  causes  of  bitter- 
ness.    Community  and  social  centres;  women's  and  civic  clubs; 


358  APPENDIX   II 

and  the  aroused  interest  of  churches,  parochial  schools,  fraternal 
orders  and  companies  engaged  in  land  colonization  are  all  essential 
to  the  case.  In  a  word,  Americanization  is  a  process  of  mental 
and  spiritual  reconstruction — if  we  can  use  the  word  spiritual  in  a 
non-religious  sense — which  must  be  accomplished  by  a  multitude 
of  forces  in  our  national  life.  The  essential  thing  now  is  that  those 
forces  he  widely  directed  so  that  they  may  accomplish  the  needed 
result,  rather  than  produce  evil  results  by  their  misdirected  though 
well-intentioned  efforts. 


INDEX 


INDEX 


Acceptances,  213 

Advertising,  20,  164-167 

Agriculture,  120,  126-127;  scien- 
tific, 130 

American  Federation  of  Labor, 
294-295 

American  Merchant  Marine,  156- 

158 
Americanization,  63-64,  356-358 
Anarchism,  316-317 
Anderson,  B.  M.,  204 
Anti-trust  laws,  260 
Arbitration,  283-284 

Balance  of  trade,  229-230 
Bank-notes,  193-197 
Bank  reserves,  209-210 
Banking  and  credit,  206-218 
Banking,    deposit    function,    207; 

loans  and  discounts,  207-209 
Banks,  kinds  of,  210-21 1 
Bills  of  exchange,  216,  231 
Bimetallism,    in    United    States, 

185-187;  international,  188 
Boas,  R.  P.,  297 
Bonds,  89-92;  214 
Book  accounts,  213 
Boycotts,  284-285 
Brassage,  183 

Budget,  325;  family,  30-34 
Bullock,  Charles  J.,  248 

Canadian  Industrial  Disputes  Act, 

283 
Canals,  148-150 
Capital,  66-70;  fixed,  67;  freedom 


of,  13;  specialized  and  free,  68; 
public,  68 

Capital  goods,  67 

Carnegie,  Andrew,  47 

"Caveat  Emptor,"  167-168 

Checks,  214;  certified,  215 

Child  labor,  285-286 

Clayton  Act,  261 

Clearing-house,  215-216,  224 

Closed  shop,  279-280 

Coal,  production  in  United  States, 
105-106 

Comforts,  28 

Commons,  John  R.,  52 

Communism,  317-318 

Competition,  14;  not  always  per- 
fect, 79 

Complimentary  goods,  79 

Consumer,  influence  upon  produc- 
tion, 44-46 

Consumer's  goods,  27 

Consumption,  21;  economic  order 
of,  26;  useful  and  harmful,  22 

Co-operation,  94-95 

Copyrights,  250 

Corn,  production  in  United  States, 
120-121 

"Corners,"  162-163 

Corporations,  88 

Cost  of  production,  80-81 

Cotton,  production  in  United 
States,  124 

Credit,  212;  uses  and  abuses,  216- 
217 

Crises,  220-225;  middlemen  and» 
224 


36] 


362 


INDEX 


Currency,   elastic,    195;  effect  of 

changes  in,  200 
Custom,  16 


Free  coinage,  183-184 
Friday,  David,  51,  311 
Future  goods,  21 


Debts,  public,  340-342 
Demand  and  supply,  74 
Demand,  elastic  and  inelastic,  74 
Diminishing   returns,    in    agricul- 
ture,   127-128;  in   manufactur- 
ing, 142 
Dividends,  insurance,  173-174 
Division  of  labor,  12;  54-55 
Division  of  occupations,  55-56 

''Economic  man,"  6 

Economics,    defined,    i ;    divisions 

of,    5;    and    other    sciences,    4; 

subject  matter  of,  4 
Edge  Act,  234 
Eight-hour  day,  287-288 
Ely,  R.  T.,  29 
Engel's  law,  31-32 
Entrepreneur,  86;   as  risk  takers, 

306-307 
Entrepreneurs,  classes  of,  307-308 
Exchange,  12;  foreign,  230-234 
Expense,  public,  325 
Extravagance,  46-48 

Factory  system,  138-139;  in  Amer- 
ica, 139-140 

Farm  products,  marketing,  132 

Farms,  size  of,  132 

Federal  Reserve  Bank  Notes,  196 

Federal  Reserve  Notes,  197 

Federal  Reserve  System,  196-197 

Fiat  money,  193 

Finance,  public,  325-344 

Fire,  prevention  of,  171;  insur- 
ance, I 70-1 7 I 

Fisher,  Irving,  203 

Fishing,  103-104 

Foreign  trade,  228 

Forest  Service,  116 


George,  Henry,  313 
Goods,  20;  economic,  21;  free,  21 
Goodyear  Tire  and  Rubber  Com- 
pany, 95-96,  351-355 
Great  Lakes,  trade  on,  158 
Greenbacks,  191-193 
Gresham's  law,  184-185 
Groups,  non-competitive,  274,  275 

Hunting,  102-103 

Immigration,  60-62 
Index  numbers,  202-203 
Industrial  Conference,  96-97 
Industrial  democracy,  95-97;  351- 

355 
Industrial  depressions,  220-225 
Industrial  revolution,  137-138 
Industrial  Workers  of  the  World, 

296 
Inheritance,  11 
Insurance,  170-178 
Interest,  300-304 
IntiSrnational  trade,  227 
Interstate  Commerce  Commission, 

152 
Iron    ore,    production    in    United 

States,  107 

Kansas  Court  of  Industrial  Rela- 
tions, 284 
Knights  of  Labor,  293-294 

Labor,  division  of,  52;  freedom 
of,  12;  organizations,  291-299; 
problems,  279-299 

Land,  increase  in,  42;  as  property, 
42 

Liberty  loans,  342 

Litchfield,  Paul,  96 


INDEX 


363 


Loans,  long  and  short  time,  302 

Lockouts,  283 

Loyal    Legion    of    Loggers    and 

Lumbermen,  296-298 
Lumbering,  110-116 
"Lump  of  labor  fallacy,"  142 
Luxuries,  28-30 

Machinery  and  labor,  141-142 
Malthusian  theory,  59-60 
Manufacturing,  137-144 
Marginal  producer,  81 
Marginal  product,  128-129 
Marketing  of  farm  products,  132- 

133 
Markets,  72-74 
Merchandising,  161-168 
Merchant  Marine  Act  of  1920,  156 
Minimum  wage,  35-36 
Mining,  104-110 
Money,  180-204 
Monopoly,  16;  246-262 
Multiple  standard,  201 

National   Banking  System,    194- 

195 
Nature,  41 
Necessaries,  27 
New  York  Stock  Exchange,  167- 

168 
Non-producers,  40 

Occupation,  division  of,  52 
Open  shop,  279-280 

Partnerships,  87-88 

Patents,  240 

Personal  services,  40 

Petroleum,  107-110 

Plehn,  Carl  C,  336 

Population,     56-59;     urban     and 

rural,  1 30-1 31 
Prices,  limits  to  regulation  of,  256; 

quantity  theory  of,  200 


Producers'  goods,  27 

Production  on  large  scale,  140 

Production  of  wealth,  39-49 

Profit-sharing,  92-93 

Profits,  306-312 

Progress,  economic,  347-348 

Promissory  notes,  212 

Property,  private,  10 

Protection  vs.  free  trade,  237-244 

Public  debts,  340-342 

Railroads,  140-154;  abuses,  152; 
competition,  150;  and  Great 
War,    154;   regulation  of,    152- 

154 
Reclamation  Service,  42-44 
Rent,  263-270 
Replacement  funds,  69 
Revenue,  public,  327 
Risks,  business,  307 
Roads,  146-148 

Salesmanship,  114 
Satiety,  law  of,  24 
Seigniorage,  183 
Selling,  high  cost  of,  163 
Shipping  Board,  157 
Single  Tax,  313-316 
Smith,  Adam,  328-330;  276-277 
Socialism,  318-323 
Society,  3 

Stabilized  dollar,  203-204 
Standard  Oil  Company,  95 
Standard  Oil  Trust,  259-260 
State,   the,   in  relation  to  indus- 
try, 97-98 
Stock-raising,  1 19-120 
Stocks,  89-92 
Storage,  162 
Strikes,  281-282 
Substitution,  law  of,  75 

Tariffs,  237 

Taxation,    a    program     of,     336; 


364 


INDEX 


exemptions  from,  337;  Indirect, 
330 

Taxes,  excise,  331-332;  on  im- 
ports, 331;  income,  332-334; 
inheritance,  334;  on  personal 
property,  335-336 

Thrift,  46 

Timber  depletion,  112-116 

Transportation,  146-160 

Trusts,  259-261 

Turnpikes,  146 

Usury,  303 

Utility,  20;  form,  39;  place,  39; 
time,  39;  possession,  40 


Value,     market, 

75-76 
Vested  rights,  i 


75;    subjective. 


Wages,  272-278 

Wants,  cultural,    19;  elementary, 

19 

Water,  transportation  by,  154-156 

Wealth,  consumption  of,  5;  dis- 
tribution of,  5;  public,  22 

Webb-Pomerene  Act,  234-235 

Welfare  Work,  93-99 

Wheat  production  in  United 
States,  121-122 

Women  wage-earners.  286 


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